Managerial Econ Cheat sheet
Perfect Competition:
1. Same product + No barriers to entry + No NPCF easy to switch.
2. Increase P slightly above market P, no sales demand is perfectly elastic.
3. D curve is horizontal at the P determined by the intersection of market S&D curves
Profit Maximzing decision
1. Since MR=MC
2. Set P (price) = MC
3. MR curve = Demand curve
4. Firms can sell all they want at this market price
Q* is the profit maximizing level of output.
1.For output < Q*, P < MC. Increase output -->increase revenue more than cost-> More π.
2. For output > Q*, P < MC. Reduce output Reduce costs increase revenues-> More π
3. Profits are determined by the green shaded area
Shut Down Decision Rule
1. Shutdown if P < AVC.
2. Continue operating if P ≥ AVC.
3. FC don’t affect the decision to operate or not
P (Q)= 80 + .4Q Supply
P (Q)= 440-.05Q Demand
A. Determine eq. price that prevails in the market
Ans To find Eq.price set S=D Qs=Qd 80 + .4Q = 440-.05Q
Solve for Q, Q= 800.Plug Q in Eq. to get P, P=400
B. If FC are $480 and VC is V (Q) = 80Q + 20 Q2
What is MR & MC?
Ans To find MR in perfect competition market with no specific demand price relationship, set MR= d(TR) / dQ = d(PQ)/dQ=P So, MR=P. For MC, MC= d(TC)/dQ = 80 + 40 Q
C. What is the prevailing Eq.Q and P at optimum? set MR = MC 400= 80 + 40 Q, --> Q=8, since P=400
D. Total Revenue?
Ans TR = P*Q= 400 * 8 = 3200
E. Continue to operate or shut-down?
AVC= V(Q)/Q
Ans P>AVC, 400>240. Operate
F. Implications of the profit maximizing price and entry or exit in the long-run? Compute π=TR-TC If profit expect Entry in long-run, if loss expect exit.
Long-Run Economic Profits
1. Profits -> entry -> increase supply -> price drop -> drop in firm level demand -> drop in profits, until profits=0. In long run, the market price drops zero economic profits
2. Losses -> firm exits -> drop in supply -> rise in price -> rise in firm level demand -> rise in
1. Same product + No barriers to entry + No NPCF easy to switch.
2. Increase P slightly above market P, no sales demand is perfectly elastic.
3. D curve is horizontal at the P determined by the intersection of market S&D curves
Profit Maximzing decision
1. Since MR=MC
2. Set P (price) = MC
3. MR curve = Demand curve
4. Firms can sell all they want at this market price
Q* is the profit maximizing level of output.
1.For output < Q*, P < MC. Increase output -->increase revenue more than cost-> More π.
2. For output > Q*, P < MC. Reduce output Reduce costs increase revenues-> More π
3. Profits are determined by the green shaded area
Shut Down Decision Rule
1. Shutdown if P < AVC.
2. Continue operating if P ≥ AVC.
3. FC don’t affect the decision to operate or not
P (Q)= 80 + .4Q Supply
P (Q)= 440-.05Q Demand
A. Determine eq. price that prevails in the market
Ans To find Eq.price set S=D Qs=Qd 80 + .4Q = 440-.05Q
Solve for Q, Q= 800.Plug Q in Eq. to get P, P=400
B. If FC are $480 and VC is V (Q) = 80Q + 20 Q2
What is MR & MC?
Ans To find MR in perfect competition market with no specific demand price relationship, set MR= d(TR) / dQ = d(PQ)/dQ=P So, MR=P. For MC, MC= d(TC)/dQ = 80 + 40 Q
C. What is the prevailing Eq.Q and P at optimum? set MR = MC 400= 80 + 40 Q, --> Q=8, since P=400
D. Total Revenue?
Ans TR = P*Q= 400 * 8 = 3200
E. Continue to operate or shut-down?
AVC= V(Q)/Q
Ans P>AVC, 400>240. Operate
F. Implications of the profit maximizing price and entry or exit in the long-run? Compute π=TR-TC If profit expect Entry in long-run, if loss expect exit.
Long-Run Economic Profits
1. Profits -> entry -> increase supply -> price drop -> drop in firm level demand -> drop in profits, until profits=0. In long run, the market price drops zero economic profits
2. Losses -> firm exits -> drop in supply -> rise in price -> rise in firm level demand -> rise in