Transcription of Chapter Nine: Profit Maximization
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Chapter Nine: Profit Maximization
Chapter 9 Lecture Notes 1 Economics 352: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are Profit maximizing. Profit is defined as: Profit = Revenue Costs (q) = R(q) C(q) )q(Cq)q(p(q) = To maximize profits , take the derivative of the Profit function with respect to q and set this equal to zero. This will give the quantity (q) that maximizes profits , assuming of course that the firm has already taken steps to minimize costs. dqdCdqdR0dqdCdqdRdqd== = or, put slightly differently, the Profit maximizing condition is for marginal revenue to equal marginal cost: MR = MC Or, put slightly differently, the additional revenue gained by making and selling one additional unit should be equal to the extra cost incurred to make and sell an extra unit.
Chapter 9 Lecture Notes 7 + = − = − = + = = + = ε ε ε ε ε 1 p MC p 1 p MC p MC p MC 1 MR p 1 MR MC So, if the price elasticity of demand is –2, the profit maximizing price is: 2 MC 1 2 MC 1 2 2 * MC = ⋅ − − = ⋅ − − p = So, the profit maximizing price will be two times the marginal cost. This formula only works if demand ...
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