Section Notes 13 Econ 100A Spring 06 1 Section Notes 13 Covering material from Lecture on February 23rd Class Outline 1 Perfect Competition 2 Profit Marginal Revenue and Marginal Cost 3 Profit Maximization 1 Perfect Competition Perfect competition is an economic environment where we take on certain assumptions Table 1 Assumptions of Perfect Competition What They Imply Assumptions 2 1 Price Taking Firms 2 Product Homogeneity 3 Free entry exit Profit Marginal Revenue and Marginal Cost Profits are defined by q R q C q Notice here that C q is the same as the T C q we saw previously So profits are a function of two functions that we can think about separately Revenue and Costs R q P q q but in perfect competition firms are price takers What does this mean about Marginal Revenue C q F c q This means Marginal Costs are determined by Section Notes 13 Econ 100A Spring 06 2 Figure 1 Revenue Costs and Profits 6 3 Profit Maximization In general firms want to maximize profits The typical problem is max R q C q q We can think about this also as max P q q C q q But remember what does the assumption of price taking mean for P q Section Notes 13 Econ 100A Spring 06 3 Problem P R Chapter 8 Exercise 4 Suppose you are the manager of a watchmaking firm operating in a competitive market Your cost of production is given by C 200 2q 2 where q is the level of output and C is total cost a If the price of watches is 100 how many watches should you produce to maximize profit b What will the profit level be c At what minimum price will the firm produce a positive output Problem P R Chapter 8 Exercise 9 a Suppose that a firm s production function is q 9x1 2 in the short run where there are fixed costs of 1000 and x is the variable input whose cost is 4000 per unit What is the total cost of producing a level of output q b Write down the equation for the supply curve c If price is 1000 how many units will the firm produce What is the level of profit Section Notes 13 Econ 100A Spring 06 Problem P R Chapter 8 Exercise 8 Suppose a firm has the following short run cost function C q q 3 8q 2 30q 5 a Find MC AC and AVC and sketch them on a graph b At what range of prices will the firm supply zero output c Identify the firm s supply curve on your graph d At what price would the firm supply exactly 6 units of output 4
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