ECON 1051 1nd Edition Lecture 31 Outline of Last Lecture I. Perfectly Competitive Market II. How a Firm Maximizes Profit in a Perfectly Competitive Market III. Marginal Revenue Outline of Current Lecture I. Excel Worksheet LabCurrent LectureI. Excel Worksheet Lab Market Price (P)= $6.00 per tonQuantity(Q)Total Cost(TC)Fixed Cost(FC)Variable Cost(VC)Total Revenue(TR)Profit (TR-TC) Marginal Cost (MC)0 $11.00 $11.00 $- $- $(11.00) 1 $15.00 $11.00 $4.00 $6.00 $(9.00) $4.00 2 $18.00 $11.00 $7.00 $12.00 $(6.00) $3.00 3 $23.00 $11.00 $12.00 $18.00 $(5.00) $5.00 4 $28.90 $11.00 $17.90 $24.00 $(4.90) $5.90 5 $35.90 $11.00 $24.90 $30.00 $(5.90) $7.00 6 $43.90 $11.00 $32.90 $36.00 $(7.90) $8.00 7 $52.90 $11.00 $41.90 $42.00 $(10.90) $9.00 8 $62.70 $11.00 $51.70 $48.00 $(14.70) $9.80 9 $73.70 $11.00 $62.70 $54.00 $(19.70) $11.00 Notes from Table: 1. Goal: Maximize profits. Growing too much is probably not profit maximizing. TR = P x QThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. Sometimes it may not be possible to earn any profits, in this case firms will try to minimize the loss 3. At p=$6, loss minimizing quantity is Q=4 tons4. By shutting down, she can't avoid the loss - it would actually be worse 5. Sometimes when fixed costs are present, producing and minimizing the loss is the best strategy If the Market Price increases to $10.00 a ton: Quantity(Q)Total Cost(TC)Fixed Cost(FC)Variable Cost(VC)Total Revenue(TR)Profit (TR-TC) Marginal Cost (MC)0 $11.00 $11.00 $- $- $(11.00) 1 $15.00 $11.00 $4.00 $10.00 $(5.00) $4.00 2 $18.00 $11.00 $7.00 $20.00 $2.00 $3.00 3 $23.00 $11.00 $12.00 $30.00 $7.00 $5.00 4 $28.90 $11.00 $17.90 $40.00 $11.10 $5.90 5 $35.90 $11.00 $24.90 $50.00 $14.10 $7.00 6 $43.90 $11.00 $32.90 $60.00 $16.10 $8.00 7 $52.90 $11.00 $41.90 $70.00 $17.10 $9.00 8 $62.70 $11.00 $51.70 $80.00 $17.30 $9.80 9 $73.70 $11.00 $62.70 $90.00 $16.30 $11.00 At p=$10, what is profit maximizing quantity? Q=8 tons as market price increases, the firm will increase optimal output (Law of Supply) If p=$15:Quantity(Q)Total Cost(TC)Fixed Cost(FC)Variable Cost(VC)Total Revenue(TR)Profit (TR-TC) Marginal Cost (MC)0 $11.00 $11.00 $- $- $(11.00) 1 $15.00 $11.00 $4.00 $15.00 - $4.00 2 $18.00 $11.00 $7.00 $30.00 $12.00 $3.00 3 $23.00 $11.00 $12.00 $45.00 $22.00 $5.00 4 $28.90 $11.00 $17.90 $60.00 $31.10 $5.905 $35.90 $11.00 $24.90 $75.00 $39.10 $7.00 6 $43.90 $11.00 $32.90 $90.00 $46.10 $8.00 7 $52.90 $11.00 $41.90 $105.00 $52.10 $9.00 8 $62.70 $11.00 $51.70 $120.00 $57.30 $9.80 9 $73.70 $11.00 $62.70 $135.00 $61.30 $11.00 Notes From Table: 1. Producing 9th ton is not optimal because the 9th ton increases your total cost faster than revenues it brings. 2. Every time additional unit of output brings in more revenue than it increase your costs, then profit maximizing firm would want to produce that unit3. Another way the firm can find profit maximizing level of output, is to keep comparing marginal revenue to marginal cost 4. If marginal revenue is bigger than marginal cost then go ahead and keep producing5. If marginal cost is bigger than marginal revenue than cut back on production 6. Only when MR=MC you should stop because you just found profit maximizing level of output 7. That does not mean that you can earn zero profits. You would earn zero profits if
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