CHAPTER 8 COMPETITVE FIRM S10 BLACKBOARD

CHAPTER 8 COMPETITVE FIRM S10 BLACKBOARD - ECON 306 CHAPTER...

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ECON 306 CHAPTER 8 THE PROFIT-MAXIMIZING FIRM IN A COMPETITIVE INDUSTRY
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© Charles R. Hulten 2009 2 THE DEFINITION OF ECONOMIC PROFIT THERE IS A DIFFERENCE BETWEEN ACCOUNTING PROFIT AND ECONOMIC PROFIT, AND THE DIFFERENCE IS THE OPPORTUNITY COST OF CAPITAL, rK ECONOMIC PROFIT IS DEFINED AS π = REVENUE MINUS TOTAL COST, OR π = pQ – C(Q) = pQ – wL – rK NOTE THAT π = 0 MEANS THAT THE CAPITAL IS JUST RECOVERING ITS OPPORTUNITY COST, rK, NOT THAT THERE IS A ZERO RETURN TO CAPITAL
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© Charles R. Hulten 2009 3 THE MATH CONDITIONS FOR PROFIT MAXIMIZATION THE PROBLEM IS TO FIND THE LEVEL OF Q THAT MAXIMIZES π = pQ – C(Q) d π /dQ = d(pQ)/dQ – dC(Q)/dQ = = p - MC(Q) = 0 P = MC BASIC CONDITION OF MAX π BUT, π CANNOT BE NEGATIVE (OR Q=0) SO, π = pQ – C(Q) 0 DIVIDING BY Q GIVES π /Q = p – AC(Q) 0, OR p AC
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© Charles R. Hulten 2009 4 THE CONDITIONS p = MC(Q) AND p AC(Q) TELL US THAT IN ORDER TO FIND THE SUPPLY CURVE OF THE FIRM, WE NEED LOOK NO FURTHER THAN THE FIRM’S COST FUNCTIONS WHERE DID WE SEE THESE FUNCTIONS? IN THE COST CURVES!
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This note was uploaded on 09/07/2011 for the course ECON 306 taught by Professor Cramton during the Spring '06 term at Maryland.

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CHAPTER 8 COMPETITVE FIRM S10 BLACKBOARD - ECON 306 CHAPTER...

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