Maximizing Profits for Firms: Theory Implementation - Optimal Output & Price - Prof. Rober, Study notes of Economics

Download Maximizing Profits for Firms: Theory Implementation - Optimal Output & Price - Prof. Rober and more Study notes Economics in PDF only on Docsity! 1 Profit Maximization for Firms with Market Power: Implementation of the Theory Chapter 12 Maurice and Thomas 8th Ed. Objectives of Discussion Find profit-maximizing level of output for any firm with market power given estimates or forecasts of – The demand function – The average variable cost function, and – The marginal cost function Determine whether or not the firm should operate given the firm’s information above Discuss problems associated with a cost-plus pricing strategy and conditions under which cost-plus pricing leads to profit maximization Summary Estimate the demand function – Substitute forecasts for M, PR or other relevant variables – Solve for inverse demand function, or P = f(Q) – Solve for marginal revenue Estimate AVC and MC functions Find output level where MR = MC Find profit maximizing price Summary (cont’d) Check the shutdown rule Compute profit or loss (P-AVC)Q - TFC Cost-plus pricing is a means of determining price by setting it equal to ATC plus % of ATC as markup: P =(1+m) ATC, where m is the markup on cost – Equivalent to profit maximizing if ATC = AVC = constant and m = -1/(1+E)