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Marginal Revenue and Marginal Cost Profit Maximization in the Short Run

Marginal Revenue and Marginal Cost Profit Maximization in the Short Run. Monopolistic competition. Imperfect competition Oligopoly Monopolistic competition Firms have some market power including the ability to change product price

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Marginal Revenue and Marginal Cost Profit Maximization in the Short Run

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  1. Marginal Revenue and Marginal CostProfit Maximization in the Short Run

  2. Monopolistic competition Imperfect competition • Oligopoly • Monopolistic competition • Firms have some market power including the ability to change product price • Produce a quantity where price is greater then marginal cost

  3. Revenue with Market Power Q P TR MR 0 $21 $0 ---- 1 $19 $19 $19 2 $17 $34 $15 3 $15 $45 $11 4 $13 $52 $7 5 $11 $55 $3 6 $9 $54 - $1 D 7 $7 $49 - $5 8 $5 $40 - $9 9 $3 $27 - $13 MR

  4. Short-run Equilibrium Q P TR MR TFC TVC TC MC AFC AVC ATC Profit 0 $21 $0 ---- $10 $0 $10 ---- $10 $0 $10.00 -$10 1 $19 $19 $19 $10 $4 $14 $4 $10 $4.00 $14.00 $5 2 $17 $34 $15 $10 $7 $17 $3 $5 $3.50 $8.50 $17 3 $15 $45 $11 $10 $11 $21 $4 $3.33 $3.67 $7.00 $24 4 $13 $52 $7 $10 $18 $28 $7 $2.50 $4.50 $7.00 $24 $17 5 $11 $55 $3 $10 $28 $38 $10 $2.00 $5.60 $7.60 6 $9 $54 - $1 $10 $47 $57 $19 $1.67 $7.83 $9.50 -$3 7 $7 $49 - $5 $10 $74 $84 $27 $1.43 $10.57 $12.00 -$35 8 $5 $40 - $9 $10 $112 $122 $38 $1.25 $14.00 $15.25 -$82 9 $3 $27 - $13 $10 $162 $172 $50 $1.11 $18.00 $19.11 -$145

  5. Short-run Equilibrium Profit maximization • When MR > MC – increase production • When MR < MC – decrease production • When MR = MC – Maximum profit • Produce quantity where MR = MC • Intersection of the marginal-revenue curve and the marginal-cost curve

  6. Short-run Equilibrium Profit Max: MR = MC MC Price D MR

  7. Short-run Equilibrium MC When Q=4 $52 Revenue $13.00 P $18 TVC TFC $10 $28 Total Cost $7.00 ATC Profit $24 $4.50 AVC D MR

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