THE FIRM’S BASIC PROFIT MAXIMIZATION PROBLEM
Chapter 2 slide 1
What Quantity of Output should the Firm Produce and Sell and at What Price? The Answer depends on Revenue and Cost Predictions. The Solution is Found using Marginal Analysis.
Expand an Activity if and only if the Extra Benefit exceeds the Extra Cost.
MAXIMIZING PROFIT FROM MICROCHIPS
2.2 A1. Focus on a single Product, A2. whose Revenues and Costs can be predicted with Certainty. Revenue can be predicted using the Demand Curve. P = 170 - 20Q or equivalently, Q = 8.5 - .05P
Write profit as = R - C
Price ($ 000) 170
Quantity in Lots
THE FIRM’S OPTIMAL OUTPUT DECISION
The Firm determines Output where MR = MC.
C = 100 + 38Q
300 200 100 0 M = 0 R = 170Q - Q2
MAXIMIZING PROFIT ALGEBRAIC SOLUTIONS
Start with Demand and Cost Information
P = 170 - 20Q and C = 100 + 38Q
Therefore, R = 170Q - 20Q2
so MR = 170 - 40Q and MC = 38
Setting MR = MC implies 170- 40Q = 38 or 132 = 40Q Q* = 132/40 = 3.3 lots P* = 170 - (20)(3.3) = $104 K
* = 343.2 - 225.4 = 117.8
MAXIMIZING PROFIT USING MARGINAL GRAPHS Set MR = MC.
There is always a tradeoff.
P* Maximum Contribution
Demand MC MR Q*
Considers changes in: Fixed Costs, Marginal costs, or Demand Conditions 170
A change in fixed cost has no effect on Q* or P* (because MR and MC are not affected).
Considers changes in: Marginal costs An increase in MC implies a fall in Q and an increase in P. Demand
2.8 Finally, consider a change in Demand Conditions.
P P* Shift in Demand MC
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