THE FIRM ’ S BASIC PROFIT MAXIMIZATION PROBLEM Chapter 2 slide 1 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.

MAXIMIZING PROFIT FROM MICROCHIPS 2.2 Write profit as  = R - C Revenue can be predicted using the Demand Curve Quantity in Lots Price ($ 000) P = Q or equivalently, Q = P A1. Focus on a single Product, A2. whose Revenues and Costs can be predicted with Certainty.

THE FIRM ’ S OPTIMAL OUTPUT DECISION 2.3 The Firm determines Output where MR = MC R, C  R = 170Q - Q C = Q  3.3 Q M  = 0

MAXIMIZING PROFIT ALGEBRAIC SOLUTIONS 2.4 Start with Demand and Cost Information P = Q and C = Q Therefore, R = 170Q - 20Q 2 so MR = Q and MC = 38 Setting MR = MC implies Q = 38 or 132 = 40Q Q* = 132/40 = 3.3 lots P* = (20)(3.3) = $104 K  * = = 117.8

Maximum Contribution MAXIMIZING PROFIT USING MARGINAL GRAPHS 2.5 Set MR = MC MC Demand Q* P* There is always a tradeoff. MR

SENSITIVITY ANALYSIS 2.6 Considers changes in: Fixed Costs, Marginal costs, or Demand Conditions MC Demand Q* P* A change in fixed cost has no effect on Q* or P* (because MR and MC are not affected).

SENSITIVITY ANALYSIS 2.7 Considers changes in: Marginal costs MC Demand Q* Q’Q’ MC ’ An increase in MC implies a fall in Q and an increase in P.

SENSITIVITY ANALYSIS 2.8 Finally, consider a change in Demand Conditions MC Shift in Demand Q* P* Q P