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21_ProfitMaximizationII

21_ProfitMaximizationII - “To develop a complete mind...

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Unformatted text preview: “To develop a complete mind, study the science of art, study the art of science. Learn how to see. Realize that everything connects to everything else.” –Leonardo Da Vinci ECON 410 Profit-Maximization II 2 Class 21 - Profit Maximization II Self-Clicker Question (P): Which of the two formats would you prefer for your 3-hour final exam? 1. 25 Multiple Choice, 0 Long- Form 2. 20 Multiple Choice, 4 Long- Form 4 Class 21 - Profit Maximization II Sus tainab le Indus try Profits Power of Input Suppliers • Supplier Concentration • Price/Productivity of Alternative Inputs • Relationship-Specific Investments • Supplier Switching Costs • Government Restraints Power of Buyers • Buyer Concentration • Price/Value of Substitute Products or Services • Relationship-Specific Investments • Customer Switching Costs • Government Restraints Entry • Entry Costs • Speed of Adjustment • Sunk Costs • Economies of Scale • Network Effects • Reputation • Switching Costs • Government Restraints Subs titutes & Complements • Price/Value of Surrogate Products or Services • Price/Value of Complementary Products or Services • Network Effects • Government Restraints Indus try Rivalry • Switching Costs • Timing of Decisions • Information • Government Restraints • Concentration • Price, Quantity, Quality, or Service Competition • Degree of Differentiation Cons umer Problem Cons umer Problem Producer Problem Sus tainab le Indus try Profits 5 Class 21 - Profit Maximization II Profit Revenue - Cost 6 Class 21 - Profit Maximization II =pq-C(q) The quantity consumers are willing to buy is affected by the price the firm sets. 7 Class 21 - Profit Maximization II Profit as a Function of Price Revenue - Cost With a market demand of D(p ) and a cost function of C(q), =pD(p)-C ( D(p) ) 8 Class 21 - Profit Maximization II Profit Maximization 1. Determine the firm’s profit function as a function of the choice variable(s). 2. Take the first order condition of the firm’s profit function with respect to the choice variable(s). 3. Solve for the profit-maximizing price, quantity, and/or profit levels. 9 Class 21 - Profit Maximization II Profit Maximization when Profit is a Function of Price 1. Determine the firm’s profit function as a function of price. 2. Take the first order condition of the firm’s profit function with respect to price. 3. Solve for the profit-maximizing price. 4. Plug the profit-maximizing price into the market demand function to determine the profit-maximizing quantity level. 5. Plug the profit-maximizing quantity and/or price levels into the profit function to determine the profit- maximizing profit level. 10 Class 21 - Profit Maximization II 11 Class 21 - Profit Maximization II Profit Revenue - Cost 12 Class 21 - Profit Maximization II =pq-C(q) The firm has to alter its price to sell a specific number of units. 13 2 4 6 8 10 12 2 4 6 8 10 12 Quantity $ Deman d Class 21 - Profit Maximization II 14 2 4 6 8 10 12 2 4 6 8 10 12 Quantity $ Deman d Class 21 - Profit Maximization II Group-Clicker Question (P): How will the profit-maximizing price level...
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