Profit Maximization for a Competitive Firm

http://www.whitenova.com/thinkEconomics/profit.html

Hey guys, here's another nice applet to use for your understanding of profit maximization by a competitive firm.

Again, here, if you scroll down you will find the section of the "Interactive Graph". There you can see the usual cost curves of a firm, i.e. the Marginal Cost (MC), the Average (Total) Cost (ATC) and the Average Variable Cost (AVC).

First you select any price on the Y-axis. This is the price that is prevalent in the market. Remember, the firm is a price taker, therefore at the prevailing market price, it's demand curve is a horizontal line. Next, once you choose the price, you are asked to choose the profit maximizing quantity. Where are the profits maximized according to what we said in class? What is the universal profit maximizing condition?

Once you find the correct profit maximizing quantity, click on it. If your answer is correct, the applet will tell you so. Then, a couple of colored rectangles will appear, and if you scroll over them, the relevant areas on the graph will be highlighted.

The areas are:
TR = Total Revenue
TC = Total Cost
Greek Capital Pi = Profit (or Loss)
TVC = Total Variable Cost
TFC = Total Fixed Cost

You can perform the same analysis for different prices too! Let me know if you have any questions!

Firms Long Run Average Cost Curve

Hey guys, as promised, here's the link to the website that talks about the actual construction of a Long Run Average Cost Curve:

http://www.whitenova.com/thinkEconomics/lrac.html

The first couple of paragraphs is a nice recap of what we talked about in class. When you scroll down, you will see a paragraph titled "Interactive Graph". SRATC stands for Short Run Average Total Cost whereas the K's refer to different levels of capital. In this case, you may think of the K's as more factories. To use the applet you have to:

Start by clicking on Q1. The applet will give you two points on the two short run cost curves. You have to chose which one is the most efficient. In other words, suppose that the market dictated that you have to produce Q1: would it make sense for you to build that next factory or not? Thus, once you click on Q1, the applet gives you your cost choices and you chose the graph that corresponds to the right factory (i.e. SRATC curve). If you do that for all quantities, Q1 to Q6 and you get the correct answer, the applet will show you have the LRAC curve is constructed.

Let me know if you have any questions on using this.Thanks.

Unit Test C

Unit Test C began on Sunday, Oct 29th and the deadline for our section is MONDAY, NOV 6th

You can find an updated Unit Test Schedule here

Externalities: Welfare Effects

New Helpful Hint - Quotas

Please note that a new helpful hint has become available on the EC10 website and concerns Quotas! Make sure you have a look at it before the hourly!!

1st Hourly Details

Change of exam location!

FOR BOTH MY 11AM AND 12PM SECTIONS: THE EXAM WILL TAKE PLACE AT 12PM IN Harvard 202!

Exam Coverage: All text readings up to and including Chapter 9 and all outside readings up to and including the ones for this week's problem set (#2).

Thus, Chapter 10 and Chapter 11 -- the topics of sections on this coming Friday and Monday will NOT be on this exam. They'll be tested on the next exam.

The official EC10 website now has "Practice Problems for First Hour Exam" section where you can find practice problems for the hourly.

For those of you that cannot attend my review section on Tuesday, 7:30-9:30pm, the Head Section Leader, David Johnson will give a coursewide review section on Tuesday 4:30-6pm, Room:TBA on the official EC10 website.

Unit Test B: Unit III

Starts on Sunday, Oct 15th. Deadline for your section is Monday, Oct 23rd.

Production Subsidy

Production subsidy increases domestic production from B" to B' (because p* intersects with S + subsidy at B').

Production subsidy = rectangle ABB'A' = brown parallelogram.

Welfare loss = blue tablecloth triangle A'B'B".

Tariff: A Numerical example

Demand: p = 22 - x

Supply: p = 2 + y

Free Trade

t = 0, p* = 5

Domestic Production. 5 = 2 + y, y = 3

Domestic Consumption 5 = 22 - x, x = 17

Import = 17 - 3 = 14.

CS = 17 × 17/2

PS = 3 × 3/2

TS = 149

---

Restricted Trade

Tariff: t = 5

p = p* + t = 10.

Domestic Production: 10 = 2 + y. y = 8

Consumption: 10 = 22 - x, x = 12

M = x - y = 4.

CS = 12 × 12/2 = 72

PS = 8 × 8/2 = 32

GS = 5 × 4 = 20

TS = 124

Deadweight Loss = 25. (The sum of the two triangles)

An Export Subsidy

An export subsidy raises the domestic price above the world price by the amount of the subsidy because domestic firms would be unwilling to sell at home for less than they would receive if the product was exported. (see diagram)

As a result, consumers lose areas A and B.
Producer surplus rises by areas A+B+C+D+E.
The cost of the subsidy to the government equals areas B+C+D+E+F.
Overall, there is a net national loss (DWL) equal to areas B+F.

Tariffs: Diagram and Analysis

Quotas: Diagrams and Analysis

Welfare Effects of a Subsidy

1st Hourly - Review Section

What? 1st Hourly Review Section

When? Tuesday, Oct 17th, 7:30pm-9:30pm

Where? Sever 103

Reminders

a. Today (Monday!) is the last day to take the Unit Test. Note that it takes place in Science Center C!

b. Problem Set 2 has been posted already and is due on Friday, Oct 13th.

c. Problem Set 1 Solutions have been posted on the website. I will return your graded problem sets (PS1) by Monday the 16th at most (probably earlier) and I ll do my best to return PS 2 before the hourly.

d. The first hourly will take place on Oct 18th. An exam memo with all the necessary details, including material covered in the hourly will be available on the official EC10 website by the end of the week.

e. Note that the first three lectures by Prof Mankiw have been uploaded and are available for viewing (especially for those of you that might have missed any of them).

f. I will hold my regular office hours this week, on Wednesday, 7-8:30pm, in Room 112 in Littauer (first floor).

g. I have scheduled a review section for Tuesday, the 17th, 7:30-9:30 in Sever 103. If you cannot make it at this time, please drop me a line for alternative arrangements.

Unit Test Room Change

The Unit Test on Monday, October 9^th will be held in Science Center C!

The original schedule said “TBA”, but a new version should be up on the web site shortly.