Lecture 12 - 10/26/2009 3 Firm Behavior profit maximization...

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10/26/2009 1 Firm Behavior ± profit maximization given production data, cost data, market information ± profits = total revenue (TR ) - total costs (TC) ± marginal revenue (MR) ± additional revenue from sale of additional unit of output ± MR = Δ TR/ Δ Q 3 ($ per output unit) ± marginal cost (MC) ± additional cost of producing additional unit of output ± MC = Δ TC/ Δ Q ± Δ Profits/ Δ Q = Δ TR/ Δ Q - Δ TC/ Δ Q MR > MC Produce more MR < MC Produce less MR = MC Profits maximized = MR - MC ($ per output unit) ± Marginal Cost (MC) - Δ TC/ Δ Q , TC = VC + FC = MC VC ; ± Total Cost (TC) ± Fixed Cost (FC) - payment to fixed inputs ± Variable Cost (VC) - payment to variable inputs Competitive Firm 3 ± Revenue ± can produce and sell all that it wants at market price MR = Δ TR/ Δ Q = Δ (pQ)/ Δ Q = p Δ Q/ Δ Q = p = Δ (pQ)/ Δ Q= p Δ Q/ Δ Q = p Quantity Total Cost Marginal Cost 02 - 131 252 394 41 45 52 06 per unit) MC Quantity < 2 Marginal Cost < Price Quantity > 2 Marginal Cost > Price ± profit maximizing level of output - compare p and MC Competitive Firm ± profit maximization: MC = p MC < p produce more MC > p produce less 3 Market Price ( = 3 ) 0 1 2 3 4 5 6 012345 Quantity Marginal Cost ($ p Quantity Total Cost Marginal Cost Supply Curve er unit) MC ± profit maximization: MC = p ± Supply curve - profit maximizing Q as a function of p MC < p produce more MC > p produce less 3 Market Price ( = 3 ) 0 1 2 3 4 5 6 Quantity Quantity Total Cost Marginal
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Lecture 12 - 10/26/2009 3 Firm Behavior profit maximization...

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