Profit Maximisation & Supply

Question 1

What is Econ π > 0?

Answer 1

“Supernormal” profit

Question 2

What is supernormal profit and what is the opposite?

Answer 2

• Over and above what you could earn somewhere else
• Creates and inducement to enter business
• Econ π

Question 3

What is the π function when profit maximising and how is it different from the cost minimisation one?

Answer 3

• π(q) = R(q) - TC(q)

- Taking into account that we now control pq

Question 4

What is important about TC?

Answer 4

TC includes OC

Question 5

Where does profit maximisation occur?

Answer 5

Profit maximisation occurs where slope TC = slope TR i.e. MC = MR

Question 6

What is d equal to for a price taker?

Answer 6

d = MR = P = AR

Question 7

What is true of MR for a price maker?

Answer 7

If the firm faces a downward demand curve, MR

Question 8

What is the QE, PE, P and TR relationship for the different points on a demand curve?

Answer 8

• Elastic: Q.E. > P.E. : ↓P = ↑TR (i.e. MR > 0)
• Inelastic: P.E > Q.E. : ↓P = ↓TR (i.e. MR ≤ 0)
• Unit Elastic: ↓P = 0∆TR (i.e. MR = 0)

Question 9

How is MR related to E?

Answer 9

MR = p(1 + 1/E) OR = p(1-1/|E|)

Question 10

How is the relationship between MR and E shown?

Answer 10

• Now profit max TR = p(q).q
• MR = ∂p/∂q * q + p(q) * ∂q/∂q
• MR = ∂p/∂q * q + p
• MR = p(1 + ∂p/∂q * q/p)
• MR = p(1 + 1/E)

Question 11

What is the relationship between MR, E and TR?

Answer 11

• If |E| > 1: MR > 0

- If |E| ≤ 1: MR

Question 12

When might a firm produce an extra unit and when will a firm produce an extra unit?

Answer 12

• Given that MR > 0, may produce extra unity

- If MC ≤ MR, firm would be definitely be interested in increasing production

Question 13

What is true of the MR Demand relationship?

Answer 13

• Slope is always twice as steep as D

- Any effects on demand will be mirrored in MR

Question 14

What determines market power?

Answer 14

The uniqueness of a product and the number of competitors are the main determinants of market power

Question 15

What is profit max for a price taker?

Answer 15

• Profit is maximised where P = MR = MC

Question 16

What is profit in a Q vs $ space?

Answer 16

• π = q*(P-AC)

- π = p(q) - ACq*

Question 17

What does the profit max location imply about the supply curve?

Answer 17

• Given any firm will always set output where P = MC, SR S-Curve is the positively shaped section of MC curve

Question 18

What is the exit rule?

Answer 18

In the LR: P ≤ minSAC: exit

Question 19

What is the LR supply curve?

Answer 19

• LR Supply curve is MC above minSAC

Question 20

How is the shutdown rule determined?

Answer 20

• π = p.q - VC - fc
• q = 0: p(0) - 0 - FC
• π = -FC
• q > 0: p.q - VC - FC ≥ 0; p.q ≥VC; P ≥AVC

Question 21

Shutdown is

Answer 21

SR

Question 22

Exit is

Answer 22

LR

Question 23

What is the shutdown rule?

Answer 23

• In the SR: P ≤ SAVC: shutdown
  
  • i.e. P ≤ VC/q
  • Minimum P to produce: Minimum AVC(vc/q): where AVC(vc/q) = MC

Question 24

What is the SR supply curve?

Answer 24

• Supply curve MC above SAVC

Question 25

What is important about STC, VC and AVC relation?

Answer 25

• STC: 0.1q^2 + 5q + 300
  
  • 0.1q^2 + 5q = VC NOT AVC,
  • AVC = VC/Q = 0.1q^1 + 5q

Question 26

WHAT is a firm’s supply curve?

Answer 26

Supply Curve: π max: P = MC

e.g. SMC: 0.2q + 5
P = 0.2q + 5
q = 5P - 25

Question 27

What is the LR existential production decision?

Answer 27

• Exit at any P where π

Question 28

What is the simple stupid way of determining SR i/o production decision?

Answer 28

• e.g. FC = 300

- Only continue producing if π > - 300

Question 29

How is the shut down price determined?

Answer 29

• P where AVC (NOT VC) = MC

- Solve for quantity, then plug back in to AVC FUNCTION to find shutdown price

Question 30

What does it mean if where AVC = MC, q = 0?

Answer 30

• Always better to produce something rather than shutdown

- Shutdown price will always be less that MC = P