Topic 3- Profit Maximization - Assignment Essays

question

profit maximizing firm

answer

the firm chooses inputs and output with the sole goal of maximizing economic profits

question

economic profits

answer

total revenue - total costs

question

marginal revenue

answer

change in total revenue as a result of a change in output

question

profit maximization FONC

answer

MR=MC

question

profit maximization SOSC

answer

second derivative of profit must be less than zero

question

elasticity of demand

answer

percentage change in quantity demanded resulting from a one percent change in price

question

marginal revenue product

answer

extra revenue a firm receives

question

short-run supply curve

answer

shows how much firm can produce at various prices and is the positively sloped part of short-run marginal cost curve

question

market price falls below Ps and average cost curve

answer

firm should stop production and pay off fixed costs in mean time

question

profit function

answer

shows maximal profits as a function of the prices the firm faces (P,v,w)

question

properties of profit function

answer

1. Homogeneity
2. Non-decreasing in output price P
3. Non-increasing in input prices w and v
4. Convex in output prices

question

homogeneity

answer

Doubling input prices would exactly double profits (describes why inflation would not change manufacturing plans)

question

non-decreasing in output price

answer

deriv of profit function with respect to price gives supply function (q star) which is greater than or equal to zero

question

non-increasing in input price

answer

deriv of profit function with respect to input prices is less than zero

question

convex in output prices

answer

if a firm can vary two input prices they would make at least the amount of profits made when only varying one input price

question

derivative of profit with respect to an input price

answer

a small increase in the price of an input would reduce profits in proportion to how much the input is used

question

derivative of profit with respect to price of output

answer

a small increase in the price of the output will increase profits by how much the firm is producing

question

how do firms choose their level of production in SR/LR?

answer

Intersection of price (marginal revenue=price) and marginal cost curve

question

exit price

answer

if below this price the firm should exit the market

question

exit price value

answer

the minimum of the long-run average cost curve

question

short-run phenomenon

answer

shut down

question

long-run phenomenon

answer

exit

question

shut down price depends on what?

answer

revenues and variable costs

question

when does a firm shut down?

answer

when the revenue is less than variable cost--> same as saying when price is less than average variable cost curve

question

FOC for profit maximization

answer

RTS of l for k = w/v

question

SOC for profit maximization

answer

1. second partial derivative for each input must be less than 0
2. determinant function > 0 (cannot be a saddle point)

question

what do labor and capital demand curves look like?

answer

competitive market it is horizontal

question

what are profits at the shut down price?

answer

there is no profit only fixed costs (-vk)

question

what is producer surplus made of?

answer

current profits plus fixed costs. Actually paid minus must be paid (VC)

question

marginal revenue product

answer

the extra revenue a firm receives when using an additional unit of an input

question

formula for marginal revenue product

answer

MRP of l= deriv of revenue with respect to l TIMES price
MRP of k= deriv of revenue with respect to k TIMES price

question

Hotelling's Lemma gives us...

answer

shows results of envelope theorem and labor/capital choice functions and firm's supply function

1 of 32

question

profit maximizing firm

answer

the firm chooses inputs and output with the sole goal of maximizing economic profits

question

economic profits

answer

total revenue - total costs

question

marginal revenue

answer

change in total revenue as a result of a change in output

question

profit maximization FONC

answer

MR=MC

question

profit maximization SOSC

answer

second derivative of profit must be less than zero

question

elasticity of demand

answer

percentage change in quantity demanded resulting from a one percent change in price

question

marginal revenue product

answer

extra revenue a firm receives

question

short-run supply curve

answer

shows how much firm can produce at various prices and is the positively sloped part of short-run marginal cost curve

question

market price falls below Ps and average cost curve

answer

firm should stop production and pay off fixed costs in mean time

question

profit function

answer

shows maximal profits as a function of the prices the firm faces (P,v,w)

question

properties of profit function

answer

1. Homogeneity
2. Non-decreasing in output price P
3. Non-increasing in input prices w and v
4. Convex in output prices

question

homogeneity

answer

Doubling input prices would exactly double profits (describes why inflation would not change manufacturing plans)

question

non-decreasing in output price

answer

deriv of profit function with respect to price gives supply function (q star) which is greater than or equal to zero

question

non-increasing in input price

answer

deriv of profit function with respect to input prices is less than zero

question

convex in output prices

answer

if a firm can vary two input prices they would make at least the amount of profits made when only varying one input price

question

derivative of profit with respect to an input price

answer

a small increase in the price of an input would reduce profits in proportion to how much the input is used

question

derivative of profit with respect to price of output

answer

a small increase in the price of the output will increase profits by how much the firm is producing

question

how do firms choose their level of production in SR/LR?

answer

Intersection of price (marginal revenue=price) and marginal cost curve

question

exit price

answer

if below this price the firm should exit the market

question

exit price value

answer

the minimum of the long-run average cost curve

question

short-run phenomenon

answer

shut down

question

long-run phenomenon

answer

exit

question

shut down price depends on what?

answer

revenues and variable costs

question

when does a firm shut down?

answer

when the revenue is less than variable cost--> same as saying when price is less than average variable cost curve

question

FOC for profit maximization

answer

RTS of l for k = w/v

question

SOC for profit maximization

answer

1. second partial derivative for each input must be less than 0
2. determinant function > 0 (cannot be a saddle point)

question

what do labor and capital demand curves look like?

answer

competitive market it is horizontal

question

what are profits at the shut down price?

answer

there is no profit only fixed costs (-vk)

question

what is producer surplus made of?

answer

current profits plus fixed costs. Actually paid minus must be paid (VC)

question

marginal revenue product

answer

the extra revenue a firm receives when using an additional unit of an input

question

formula for marginal revenue product

answer

MRP of l= deriv of revenue with respect to l TIMES price
MRP of k= deriv of revenue with respect to k TIMES price

question

Hotelling's Lemma gives us...

answer

shows results of envelope theorem and labor/capital choice functions and firm's supply function

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order