204_summer_2009_lecture_17

204_summer_2009_lecture_17 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 17 1 Ajaz Hussain. Department of Economics Last Time Avoiding or Escaping Competition Monitoring preferences Sustainable cost advantage Barriers to Entry Exogenous Endogenous Firms with Market power Pricing and output Without opportunity cost Ajaz Hussain. Department of Economics 2 Today Pricing with opportunity cost Economics of multiple activities Mathematics of multiple activities Opportunity cost technique Multivariate optimization technique Marginal profit technique Franchise Contracts Revenue sharing contracts Franchisor sets prices Franchisee sets prices Profit sharing contracts Ajaz Hussain. Department of Economics 3 Decisions With & Without Opportunity Cost Ajaz Hussain. Department of Economics 4 Production Function Output Inputs Price Maker Price Taker Production Function Output Inputs Price Maker Price Taker Other Price Maker or Price Taker Decision with no opportunity cost Decision with opportunity cost Max Output with Opportunity cost Ajaz Hussain. Department of Economics 5 Production Function Output Suppose input allocated here Other Inputs o determine optimal output ( not optimal amounts of other activity), analyze the conomics of producing another unit of the output: evenue from producing another unit of output = MR ost of producing another unit of output = MC rofits from (hypothetically) allocating inputs to other activity = opportunity cost Should Inputs be Allocated to Output? Profit from producing another unit of output: Marginal = MR MC If MR MC > opportunity cost Allocate inputs to output If MR MC < opportunity cost Allocate inputs to other activity If MR MC = opportunity cost Optimal allocation of inputs across both activities Ajaz Hussain. Department of Economics 6 Example: PTC with No Opportunity Cost P = 1,466 4.83Q MR = 1,466 9.66Q C = 197,820 + 28Q MC = 28 MR = MC 1,466 9.66Q = 28 Q = 148.9 P = 1,466 4.83Q P = 1,466 4.83(148.9) P $747 Total revenue hours < Total hours That is: Hours are available Ajaz Hussain. Department of Economics 7 $ q R $ q Demand MR = 1466 9.66Q TVC = 28Q MC 28 1466 747 Max PTC: Usable Hours Ajaz Hussain. Department of Economics 8 Exhibit 1:...
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204_summer_2009_lecture_17 - University of Toronto...

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