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lecture13

lecture13 - Professor Jay Bhattacharya Spring 2001 Firm...

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Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 13 1 Spring 2001 Econ 11--Lecture 13 1 Firm Objectives • Cost minimization: Given a fixed output level (without any story about how this output is determined) firms choose the minimum cost combination of inputs. • Profit maximization: Firms choose that level of output that yields the highest level of profits. Spring 2001 Econ 11--Lecture 13 2 Profit • Profit = Revenue – Cost • Last class, we analyzed costs in detail. – The cost minimization problem produces a function C(Q), which represents minimum costs given output Q. • Revenue is output multiplied by the price at which that output sells—R(Q) = PQ. Spring 2001 Econ 11--Lecture 13 3 Profit Maximization—Choosing Output •m ax Π = R ( Q )– C ( Q ) • First order condition: • Interpretation: To maximize profits, set marginal revenue (d R /d Q ) equal to marginal cost (d C /d Q ). 0 dd R d C d R d C dQ dQ dQ dQ dQ Π =−= Þ = Spring 2001 Econ 11--Lecture 13 4 Supply: How much will firms produce? • If a firm produces at all, it will produce an amount such that MR = MC. – If the extra revenue generated from producing 1 extra unit of output (MR) exceeds the additional cost of producing that unit, then the firm can increase its profit by expanding output by 1 unit. Spring 2001 Econ 11--Lecture 13 5 Second Order Condition • The SOC is important because of “S” shaped cost curves. • Also, if price falls below AVC, the firm (if it produced positive amounts of output) would earn a loss. Instead, it should go out of business 22 2 222 0 R d C dQ dQ dQ Π =−< Spring 2001 Econ 11--Lecture 13 6 Graphical Presentation C(Q) Q C,R R(Q)-C(Q) Q Π R=PQ slope = P Q * Q ** Q * Q ** 0

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Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 13 2 Spring 2001 Econ 11--Lecture 13 7 Nicholson Example Problem Would a lump-sum profits tax affect the profit maximizing quantity of output? How about a proportional tax on profits? How
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lecture13 - Professor Jay Bhattacharya Spring 2001 Firm...

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