Section Notes 20, Econ 100A Spring ’06 1Section Notes 20Covering material from Lecture on March 23rdClass Outline1. Advertising2. Factor MarketsFinish Problems from last section notes.1 AdvertisingAs was discussed in lecture, when a firm starts to lose its monopoly advantage, one of the ways it con-tinues to extract rents is by catering to consumer loyalty, or perceptions of quality. This is done throughadvertising. We can then literally think about advertising as something a firm chooses over, and thereforeoptimizes over.Problem: (P&R, Chapter 11, Exercise 17)Consider a firm with monopoly power that faces the demand curveP = 100 − 3Q + 4A1/2and has the total cost functionC = 4Q2+ 10Q + Awhere A is the level of advertising expenditures, and P and Q are price and output.a. Find the values of A, Q, and P that maximize the firm’s profit.b. Calculate the Lerner index, L = (P − M C)/P , at this firm’s profit-maximizing levels of A, Q, and P .Section Notes 20, Econ 100A Spring ’06 22 Factor MarketsSo far we’ve been making profit maximizing choices from a given cost function where we cho ose a quantity toproduce. However, from previous chapters we’ve seen that these cost functions really come from our choiceof inputs. Therefore, we can equivalently think about maximizing profits, or making optimal productiondecisions over inputs.Problem: (P&R, Chapter 11, Exercise 6)Suppose that a firm’s production function is given by Q = 12L − L2, where L is labor input per day andQ is output per day. Derive and draw the firm’s demand for labor curve if the firm’s output sells for $10in a competitive market. How many workers will the firm hire when the wage rate is $30 per day? $60
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