Lecture 15 - Lecture 15 Profit Maximization II Let us not...

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Lecture 15 Profit Maximization II Let us not confuse the ethic of work with the ethic of plunder. Nibley, Hugh. “Our Glory or Our Condemnation,” Approaching Zion , 1989, p. 11. The Economics Outline 1. Producer Surplus 2. Revenue Maximization 3. Principal-Agent Problem The Mathematics Outline 1. Algebra & Calculus Producer Surplus The area below the market price and above the supply curve represents the gain the firm gets from producing and is called producer surplus. A formula for producer surplus: Producer Surplus = π + SFC Proof: SFC SFC q TC q TR TC P q TC q P q TC q P dq MC P q q + = + = = = = π )] ( ) ( [ )] 0 ( 0 [ )] ( [ ) ( ) ( Surplus Producer * * * * 0 0 * * Example 1: Suppose SFC = $25, the MC of producing the first unit is $5 and that I can sell it for $10. Profit in this scenario is -$20. Producer surplus is π + SFC = -$20 + $25 = $5. Dr. Steven Waters Econ 380 Page 1 of 6
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L15: Profit Maximization II Example 2: Suppose 2 01 . 16 q STC + = q MC 02 . = q SAVC 01 . = q q SATC 2 01 . 16 + = The supply function is the MC curve (above SAVC ) – notice that this happens at a price of zero. The graph of the problem looks like this: Average Costs and Marginal Cost $0 $1 $2 $3 $4 $5 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 Quantity Price Marginal Cost Average Total Cost Average Variable Cost In this example we want to calculate the producer surplus, i.e., the area below price and above the supply curve. Let’s look at three ways of doing this: Dr. Steven Waters Econ 380 Page 2 of 6
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Lecture 15 - Lecture 15 Profit Maximization II Let us not...

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