ch11 - Chapter 11 PROFIT MAXIMIZATION 1 Output Choice Total...

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1 Chapter 11 PROFIT MAXIMIZATION
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2 Output Choice • Total revenue for a firm is given by R ( q ) = p ( q ) q • Why does the price depend on q ? • To sell a larger number of products the first must lower the price.
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3 Output Choice • Total cost of producing q is given by C ( q ). • Economic profits ( ) are the difference between total revenue and total cost ( q ) = R ( q ) – C ( q ) = p ( q ) q C ( q )
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4 Output Choice • The firm choose how much to produce by maximizing profit: Max R ( q ) – C ( q ) Max p ( q ) q C ( q )
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5 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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6 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 dq d
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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 price of that good. • The second term suggests that as we
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ch11 - Chapter 11 PROFIT MAXIMIZATION 1 Output Choice Total...

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