Section Notes 13, Econ 100A Spring ’06 1Section Notes 13Covering material from Lecture on February 23rdClass Outline1. Perfect Competition2. Profit, Marginal Revenue and Marginal Cost3. Profit Maximization1 Perfect CompetitionPerfect competition is an economic environment where we take on certain assumptions.Table 1: Assumptions of Perfect CompetitionAssumptions What They Imply1. Price Taking Firms ⇒2. Product Homogeneity ⇒3. Free entry/exit ⇒2 Profit, Marginal Revenue and Marginal CostProfits are defined by:π(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 functionsthat 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 MarginalRevenue?C(q) = F + c(q). This means Marginal Costs are determined by...Section Notes 13, Econ 100A Spring ’06 2Figure 1: Revenue, Costs, and Profits-63 Profit MaximizationIn general firms want to maximize profits. The typical problem is:maxqR(q) − C(q)We can think about this also as:maxqP (q) · q − C(q)But remember, what does the assumption of price taking mean for P (q)?Section Notes 13, Econ 100A Spring ’06 3Problem: (P&R, Chapter 8, Exercise 4)Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost ofproduction is given by C = 200 + 2q2, 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 = 9x1/2in 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 producinga 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 4Problem: (P&R, Chapter 8, Exercise 8)Suppose a firm has the following short-run cost function C(q) = q3− 8q2+ 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
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