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    DaMin Zhou
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    The document discusses how a firm can maximize its profit by determining the optimal quantity to produce. It explains that a firm should: 1) Focus on a single product whose revenues and costs can be predicted with certainty. Revenues can be predicted using the demand curve and costs using the cost curves. 2) Determine the optimal output quantity where marginal revenue (MR) equals marginal cost (MC). This is found by setting the demand and cost equations equal to each other and solving for quantity. 3) The optimal quantity maximizes profit, with price determined by the demand curve at that quantity. Sensitivity analysis can then examine how changes in costs or demand would affect optimal quantity and price.

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    ch02

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    The document discusses how a firm can maximize its profit by determining the optimal quantity to produce. It explains that a firm should: 1) Focus on a single product whose revenues and costs can be predicted with certainty. Revenues can be predicted using the demand curve and costs using the cost curves. 2) Determine the optimal output quantity where marginal revenue (MR) equals marginal cost (MC). This is found by setting the demand and cost equations equal to each other and solving for quantity. 3) The optimal quantity maximizes profit, with price determined by the demand curve at that quantity. Sensitivity analysis can then examine how changes in costs or demand would affect optimal quantity and price.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    6 views8 pages

    CH 02

    Uploaded by

    DaMin Zhou
    The document discusses how a firm can maximize its profit by determining the optimal quantity to produce. It explains that a firm should: 1) Focus on a single product whose revenues and costs can be predicted with certainty. Revenues can be predicted using the demand curve and costs using the cost curves. 2) Determine the optimal output quantity where marginal revenue (MR) equals marginal cost (MC). This is found by setting the demand and cost equations equal to each other and solving for quantity. 3) The optimal quantity maximizes profit, with price determined by the demand curve at that quantity. Sensitivity analysis can then examine how changes in costs or demand would affect optimal quantity and price.

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    © All Rights Reserved
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    of 8

    THE FIRMS BASIC PROFIT

    MAXIMIZATION PROBLEM
    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.

    Chapter 2
    slide 1

    MAXIMIZING PROFIT
    FROM MICROCHIPS
    Write profit as = R - C
    Price
    ($ 000)

    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.

    170

    P = 170 - 20Q

    130

    or equivalently,
    Q = 8.5 - .05P

    90
    50

    Quantity
    in Lots

    THE FIRMS OPTIMAL


    OUTPUT DECISION

    2.3

    The Firm determines Output


    where MR = MC.

    R, C

    C = 100 + 38Q

    300
    R = 170Q - Q2

    200
    M = 0

    100

    0
    -100

    3.3

    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

    2.4

    2.5

    MAXIMIZING PROFIT
    USING MARGINAL GRAPHS
    There is always
    a tradeoff.

    Set MR = MC.
    170

    P*
    Demand

    Maximum
    Contribution

    MC

    38

    MR
    Q*

    2.6

    SENSITIVITY ANALYSIS

    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).

    P*
    Demand
    MC

    38

    Q*

    2.7

    SENSITIVITY ANALYSIS
    Considers changes in: Marginal costs
    An increase in MC
    implies a fall in Q
    and an increase in P.

    170

    Demand
    MC
    MC

    38

    Q Q*

    SENSITIVITY ANALYSIS

    2.8
    Finally, consider a change
    in Demand Conditions.

    170

    P
    P*

    Shift in
    Demand

    38

    MC

    Q*

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