9781118041581

3. If economic conditions change, the firm’s optimal price and output will
   change according to the impact on its marginal revenues and marginal
   costs.

Nuts and Bolts

1. The basic building blocks of the firm’s price and output problem are its
   demand curve and cost function. The demand curve describes (1) the
   quantity of sales for a given price or, conversely, (2) the price needed to
   generate a given level of sales. Multiplying prices and quantities along the
   demand curve produces the revenue function. The cost function estimates
   the cost of producing a given level of output. Combining the revenue and
   cost functions generates a profit prediction for any output Q.


2. The next step in finding the firm’s optimal decision is to determine the
   firm’s marginal profit, marginal revenue, and marginal cost.
   a. Marginal profit is the extra profit earned from producing and selling
   an additional unit of output.
   b. Marginal revenue is the extra revenue earned from selling an
   additional unit of output.
   c. Marginal cost is the extra cost of producing an additional unit of output.
   d. By definition, marginal profit is the difference between marginal
   revenue and marginal cost: MMR MC. The M, MR, and MC
   expressions can be found by taking the derivatives of the respective
   profit, revenue, and cost functions.


3. The firm’s optimal output is characterized by the following conditions:
   (1) M0 or, equivalently, (2) MR MC. Once output has been
   determined, the firm’s optimal price is found from the price equation,
   and profit can be estimated accordingly.

Questions and Problems

1. A manager makes the statement that output should be expanded as long
   as average revenue exceeds average cost. Does this strategy make sense?
   Explain.


2. The original revenue function for the microchip producer is R 170Q 
   20Q^2. Derive the expression for marginal revenue, and use it to find the
   output level at which revenue is maximized.Confirm that this is greater
   than the firm’s profit-maximizing output, and explain why.


3. Because of changing demographics, a small, private liberal arts college
   predicts a fall in enrollments over the next five years. How would it apply
   marginal analysis to plan for the decreased enrollment? (The college is a
   nonprofit institution, so think broadly about its objectives.)

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