Chapter 9 Profit Maximization

Question 1

Relate the definition of producer surplus to the relationship between marginal revenue and marginal cost

Answer 1

Producer surplus = revenue less its avoidable costs. Think of the area between marginal revenue and marginal cost graphically displaying that. When producer surplus is maximized, Marginal revenue = Marginal cost

Question 2

Knowing the firm is a price taker and given the cost function, how can you derive the supply function? What if there is an added avoidable fixed cost?

Answer 2

You must first calculate MC. In this case, since the firm is a price taker, MC = P. Solving for Q will get you the short run supply function and you must apply limitations on it depending the price limitations. Look at ex 2 in ch 9. If there is added avoidable fixed cost, then add it to the total cost function and divide it by Q to find AC. Now equate AC to MC.

Question 3

Given two production plants and their respective cost functions, how can you find their total cost minimizing Q?

Answer 3

Find the marginal cost of each plant and equate them to find the ratio of quantities each plant will be using.

Question 4

Given two production plants and their respective cost functions, how do you find their supply functions?

Answer 4

Find their total cost function
find MC
find AC
S(Q) = solving for Q in MC
set AC = MC
solve for Q and plug into MC to find P

Question 5

What does AC tell us about the supply function?

Answer 5

In order to find the limitations we must place on the supply function, we need P (or MC) to be greater than the average cost at a level of Q (solved for from MC = AC) or else there is no profit to be made