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are201firmpricing

# are201firmpricing - Profit Maximization by the Firm...

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Profit Maximization by the Firm SITUATION 1: PRICE TAKER - firm has no control over price, and takes price as “given” – objective of firm is to sell the amount of output that will maximize its profits Way 1: Calculate profit at alternative production level; “given” price is \$15 per pizza # pizzas sold revenues total cost profit 0 \$0 \$10,000 -\$10,000 1000 \$15,000 \$18,000 -\$3000 2000 \$30,000 \$24,000 \$6000 3000 \$45,000 \$27,000 \$18,000 4000 \$60,000 \$40,000 \$20,000 Maximize profit here Another example: “Given” price is \$12 per pizza # pizzas sold revenues total cost profit 0 \$0 \$10,000 -\$10,000 1000 \$12,000 \$18,000 -\$6000 2000 \$24,000 \$24,000 \$0 3000 \$36,000 \$27,000 \$9000 Maximize profit here 4000 \$48,000 \$40,000 \$8000 Way 2: Go to the output level as long as Price is greater than Marginal Cost # pizzas sold total cost marginal cost 0 \$10,000 - 1000 \$18,000 (\$18,000-\$10,000)/1000 = \$8 2000 \$24,000 (\$24,000-\$18,000)/1000 = \$6 3000 \$27,000 (\$27,000-\$24,000)/1000 = \$3 4000 \$40,000

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are201firmpricing - Profit Maximization by the Firm...

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