Class 9-2010 - 10/7/2010 Managerial Econ: Class 9 Oct. 7...

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10/7/2010 1 THE UNIVERSITY OF BRITISH COLUMBIA Managerial Econ: Class 9 – Oct. 7 The Competitive Model 1. Questions on Firm Organization 2. Market Structure 3. Perfect Competition 4. Profit Maximization for a Competitive Firm 5. The Shutdown Decision for a Competitive Firm 6. The Short Run Supply Curve 7. The Long Run 8. Summary and Conclusion THE UNIVERSITY OF BRITISH COLUMBIA Enrico’s Problem Enrico’s effort Normal High Enrico’s opportunity cost $0 $40,000 Total profit $1,000,000 $1,200,000 Enrico’s 10% profit share $100,000 $120,000 Enrico’s net benefit = his profit share – his opportunity cost $100,000 $80,000 Shareholders profit = total profit – Enrico’s earnings $900,000 $1,080,000 Enrico is an executive. He can work hard (high effort) or he can provide normal work effort and enjoy his leisure. If his payment is 10% of profits. Enrico would prefer to provide normal effort, but this is damaging to the shareholders. What happens if Enrico gets 15%? What happens if Enrico gets 30%.
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10/7/2010 2 THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question - Correction 2 of 4 Which statement about Enrico’s problem is true? a. The gain to Enrico from normal effort equals the loss to shareholders. b. If Enrico received a profit share of 15% the interests of Enrico and the shareholders would be aligned. c. If Enrico received a profit share of 30% the interests of Enrico and the shareholders would be aligned. d. a and c. e. b and c. The correct answer is b. THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1 Which of the following statements if correct? a. Most firms are unincorporated and such firms produce most of the economy’s output. b. Most firms are incorporated and such firms produce most of the economy’s output. c. The private sector and the public sector are of about equal size in Canada. d. Incorporated firms must have shares that are traded in public exchanges like the Toronto Stock Exchange. e. None of the above. 2 of 4
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10/7/2010 3 THE UNIVERSITY OF BRITISH COLUMBIA 2. Market Structure Monopoly Oligopoly Monopolistic Competition (Perfect) Competition 1. Ability to set price Price setter Price setter Price setter Price taker 2. Price level very high high high low 3. Entry conditions No entry Limited entry Free entry Free entry 4. Number of firms 1 Few Few or many Many 5. Long-run profit 0 00 0 6. Strategic Interdependence No (has no rivals) Yes No (cares only about price) 7. Products Single product May be differentiated May be differentiated Undifferentiated 8. Example BC Hydro Automobile Restaurants Apple farmers THE UNIVERSITY OF BRITISH COLUMBIA 3. Perfect Competition A perfectly competitive firm is a firm that is so small relative to the
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This note was uploaded on 01/19/2011 for the course COMMERCE 290 taught by Professor Brianogram during the Spring '09 term at The University of British Columbia.

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Class 9-2010 - 10/7/2010 Managerial Econ: Class 9 Oct. 7...

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