1. Last class: Today: Next class: Readings:
CDAE Class 24 Nov 16
Last class:
7. Profit maximization and supply
Class exercise
Today:
Result of Quiz 7
Next class:
8. Perfectly competitive markets
Readings:
Chapter 7 and the first 3 sections of Chapter 8

2. Important dates: Problem set 6 due today
CDAE Class 24 Nov 16
Important dates:
Problem set 6 due today
Problem set 7 due Tuesday, Dec. 5
Problems 7.1, 7.2., 7.3 and 7.8 from the textbook
Final exam: 3:30 – 6:30pm, Friday, Dec. 15

3. 7. Profit maximization and supply
7.1. Goals of a firm
7.2. Profit maximization
7.3. Marginal revenue and demand
7.4. Marginal revenue curve
7.5. Alternatives to profit maximization
7.6. Short-run supply
7.7. Applications

4. N = 43 Range = 5 – 10 Average = 8.52 Result of Quiz 7
1. How will a company change L and K when w/v is not equal to the RTS?
2. Returns to scale and calculate TC, AC and MC
(1) Returns to scale
(2) Calculate TC, AC and MC
3. Draw a graph AND use the graph to explain why the TC in the short run
is likely to be higher than that in the long run for the same level of output
4. Major difference between accounting cost and opportunity cost
5. For a given TC function
(2) AC = MC =
6. Relation between MC and q   returns to scale

5. Class exercise
Suppose that the demand function for a company’s product is estimated as q = P where q is the quantity and P is the price.
(1) Draw the demand curve
(2) Derive the MR function and draw the MR curve
(3) What is the price elasticity of demand when P=4?
(4) If the company wants to increase its market share, should it increase or decrease its price (current price is 4)?

6. 7.5. Alternatives to profit maximization
(1) TR maximization
-- A graphical analysis
-- Comparison of profit maximization and TR
maximization:
Output level:
Total profit:
(2) Markup pricing:
-- P = AC + markup
-- Markup and price elasticity of demand
(e.g, textbooks vs. general books)

7. 7.6. Short-run supply by a price-taking firm
(1) Profit maximizing decision: MC = MR = P
(2) The firm’s supply
(3) Shutdown decision:
STC = SFC + SVC
If TR < SVC , the company should shut down
SAC = SAFC + SAVC
i.e., If the price is less than the short-run
average variable cost (SAVC), the firm will
shut down the production.
(4) The firm’s supply curve: SMC above the SAVC

8. 7.6. Short-run supply by a price-taking firm
(5) Practice questions according to the graph on the blackboard
(a) Where is the firm’s supply curve
(b) What is the break-even production level
(c) What is the shutdown price level?
(d) What is the total profit at the shutdown price?
(e) What is the total profit when P= 8?
( f ) What is the total fixed cost?