ECON100A_15 - ProfitMaximizationand Supply 1/4/2008 1

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
 1/4/2008 1 Profit Maximization and  Supply
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
 1/4/2008 2 Assumptions - Perfectly Competitive  Market: Homogeneous commodity Large number of firms: (Each firm assumes its actions have no effect on market price) Free entry in long run Perfect information Prices known by all participants
Background image of page 2
 1/4/2008 3 LAW OF ONE PRICE In equilibrium, all transactions occur at one price
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
 1/4/2008 4 Profit Maximization - Algebraically Maximize Total Revenue minus Total Cost max PQ-LTC(Q,w,r) Q FOC: Q* solves: (P=LMC(Q*,w,r)) Solution function is Q*(P,w,r) Q r)/ w, LTC(Q, P =
Background image of page 4
 1/4/2008 5 Intuition:  What if P>LMC?      What if P < LMC? Suppose P=20 , LMC(Q, w,r)=12 Produce 1 more (Get 20, costs 1 2 , so this gives firm $8 more profit.) If P still less than LMC, produce 1 more. Keep producing more output until P=LMC (LMC is eventually rising with Q so eventually LMC does reach P). Suppose P=20 , LMC(Q, w,r)=30 Produce 1 less (Lose 20, save 30 in costs, so this gives $10 more profit.) If P still less than LMC, produce 1 less. Keep reducing output until
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 24

ECON100A_15 - ProfitMaximizationand Supply 1/4/2008 1

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online