ch09 - Chapter 11 PROFIT MAXIMIZATION 1 Profit Maximization...

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1 Chapter 11 PROFIT MAXIMIZATION
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2 Profit Maximization • A profit-maximizing firm chooses both its inputs and its outputs with the goal of achieving maximum economic profits
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3 Economic Profits One can think of doing profit maximization in two parts. First, for a given level of output, one can minimize total costs. We can therefore derive C(q) . Second, one can choose the appropriate level of output. Today will discuss the optimal choice of output.
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4 Output Choice • Total revenue for a firm is given by R ( q ) = p ( q ) q
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5 Output Choice • Total cost of producing q is given by C ( q ). • Economic profits ( ) are the difference between total revenue and total costs ( q ) = R ( q ) – C ( q ) = p ( q ) q C ( q )
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6 Output Choice • The firm choose how much to produce by maximizing profit: Max ( q ) Max R ( q ) – C ( q ) Max p ( q ) q C ( q )
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7 Output Choice • The first order condition can be found by setting the derivative of the profit function with respect to q equal to zero 0 dq dC dq dR dq d dq dC dq dR • Profits are maximized where marginal revenue is equal to marginal cost:
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8 Second-Order Conditions MR = MC is only a necessary condition for profit maximization • For sufficiency, it is also required that 0 ) ( ' * * 2 2 q q q q dq q d dq d
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9 Marginal Revenue • Marginal revenue can be divided into two components: dq dp q q p dq q q p d q MR ) ( ] ) ( [ ) ( • The first term shows that as we increase production, we will gain in revenue the
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This note was uploaded on 04/19/2010 for the course ECON Econ 11 taught by Professor Mcdevitt during the Spring '07 term at UCLA.

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ch09 - Chapter 11 PROFIT MAXIMIZATION 1 Profit Maximization...

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