Short Run-Profit Maximization by a Perfectly Competitive Firm
- Short Run-Profit Maximization by a Perfectly Competitive Firm
Profit is found as total revenue (TR) minus total cost (TC). With that in mind, let us now consider the possible profits for the firm that we looked at in assignments 7 and 8, where the firm’s capital is fixed at 2 units and where the cost of capital is $40 per unit per period, while the cost of labor (or wage rate) is $30 per unit of labor per period and the firm has the following short run production function:
| Labor: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Output: | 0 | 6 | 24 | 60 | 120 | 170 | 210 | 240 | 260 | 270 |
Now, let us further assume that the firm is perfectly competitive (i.e., it is a price taker) and that it can sell each unit of the output that it produces for $3 [remember, for price takers, the price (P) is also the marginal revenue (MR)].
(a) Use this information set up a diagram (i.e., an excel chart) that shows total cost (TC) and total Revenue (TR) of the firm per period in the short run with the level of output on the horizontal axis.
(b) Also, use this information to then set up another diagram showing the firm’s short-run marginal cost (MC) and marginal revenue (MR) with quantities on the horizontal axis.
(c) Copy both your charts into a Word or pdf file that also has an essay on the profit of the firm along with some discussion on the nature of profit maximization for perfectly competitive firms.
- Monopoly price discrimination
Consider a monopolistic firm selling the same product in two completely separate markets (market 1 and market 2) with the following demand schedules (BTW: assume that the numbers given are based continuous linear demand curves in each market):
| Quantity (Q1) | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Price (P1) | 24 | 21 | 18 | 15 | 12 | 9 | 6 | 3 | 0 |
| Quantity (Q2) | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Price (P2) | 40 | 35 | 30 | 25 | 20 | 15 | 10 | 5 | 0 |
The marginal cost of this firm is equal to its average total cost and is constant at $15 per unit produced (note that this also means that there are no fixed costs). Based on this information use excel to calculate marginal revenues and set up diagrams that show the demand and the marginal revenue curves of this firm in each market, as well as the quantities and prices it should charge in these markets in order to maximize overall profits. (BTW: As you set up your diagrams, remember that marginal values should be placed in the middle of the range over which the marginal value is calculated).
Include your diagrams and calculations in an essay about the nature of price discrimination by Monopolies. Make sure that you include the total profit (i.e., the combined profit from the two markets) as a part of your answer and explain why exactly the firm should charge different prices in the two markets in order to maximize total profit. Also, as part of your answer, give at least 3 specific examples of price discrimination that is commonly seen from sellers with market power.
Copy both your charts into a Word or pdf
The assignment must be your own original work and it must be written specifically for this class. The assignment will be checked for originality using turnitin.com. Any citation omissions will affect your assignment grade, but significantly plagiarized assignments will receive a grade of zero, with no exceptions and with no do-overs.
CITATIONS:
You must cite all your sources.
PROPER QUOTATIONS & QUOTATION MARKS:
You must use quotation marks, or else use indented blocks, to identify all quotations. It is OK to paraphrase and not use direct quotes only when your language is completely different from the original, but you must still give proper credit to your sources. It is not OK to just insert a few words of your own into another writer’s text and then appropriate it without using quotation marks.
