Unformatted text preview: ⏟ Re-arranging this expression yields a
like expression except that now the
plus the marginal opportunity cost of producing another unit of output:
⏟ is the marginal of production ⏟ If the firm is producing at full capacity then at the optimal solution “marginal revenue = marginal cost of production plus
the marginal opportunity cost of allocating funds to produce output instead of expanding capacity”. Note that is a positive opportunity cost because whenever capacity is less than the unconstrained solution, had the firm allocated
resources to expand capacity instead of producing output, this would’ve resulted in higher profits (see graph above).
Check when/if ? Check when/if ? This says the company should produce the minimum output of zero (i.e.
need to see when . Substitute ⏟ and (⏟) ). To see when Case C arises we in the FOC
() ⏟ ⏟ ⏟ ⏟ (⏟) Now:
ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Eco...
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