1. 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.

2. MAXIMIZING PROFIT FROM MICROCHIPS 2.2 Write profit as  = R - C Revenue can be predicted using the Demand Curve. 0 2 4 6 8 170 130 90 50 Quantity in Lots Price ($ 000) P = 170 - 20Q or equivalently, Q = 8.5 -.05P A1. Focus on a single Product, A2. whose Revenues and Costs can be predicted with Certainty.

3. THE FIRM ’ S OPTIMAL OUTPUT DECISION 2.3 The Firm determines Output where MR = MC. 0 2 4 6 8 R, C  R = 170Q - Q 2 300 200 100 0 -100 C = 100 + 38Q  3.3 Q M  = 0

4. MAXIMIZING PROFIT ALGEBRAIC SOLUTIONS 2.4 Start with Demand and Cost Information P = 170 - 20Q and C = 100 + 38Q Therefore, R = 170Q - 20Q 2 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

5. Maximum Contribution MAXIMIZING PROFIT USING MARGINAL GRAPHS 2.5 Set MR = MC. 38 170 MC Demand Q* P* There is always a tradeoff. MR

6. SENSITIVITY ANALYSIS 2.6 Considers changes in: Fixed Costs, Marginal costs, or Demand Conditions 38 170 MC Demand Q* P* A change in fixed cost has no effect on Q* or P* (because MR and MC are not affected).

7. SENSITIVITY ANALYSIS 2.7 Considers changes in: Marginal costs 38 170 MC Demand Q* Q’Q’ MC ’ An increase in MC implies a fall in Q and an increase in P.

8. SENSITIVITY ANALYSIS 2.8 Finally, consider a change in Demand Conditions. 38 170 MC Shift in Demand Q* P* Q P