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Unformatted text preview: f Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. ()
⏟ In case B ( ) which allows us to re-interpret the FOC. From the envelope theorem recall that so that the FOC for case B can be written as:
⏟ ⏟ ⏟ Re-arranging this expression yields a
like expression except that now the
opportunity cost of producing another unit of output:
⏟ is interpreted as the marginal ⏟ If the firm is producing at full capacity then at the optimal solution “marginal revenue = marginal opportunity cost of
allocating funds to produce output instead of expanding capacity”. is a positive opportunity cost when capacity is less than the unconstrained solution because had resources been used to expand capacity instead of producing output,
it would’ve resulted in higher revenues (see graph above).
Check when/if ? Check when/if ? This says the company should produce the minimum output of zero (i.e.
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