The Maximum

Production Function
With One Variable Input

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

p. 233

Slide 2

Optimal Use of the

Variable Input
Marginal Revenue
Product of Labor

p. 235

MVPL = MRPL
MRPL = (MPL)(MR)
MR = P

TC

Marginal Resource
Cost of Labor

MRCL =

Optimal Use of Labor

MRPL = MRCL = w

=w

Should continue to hire L as long as MRPL > MRCL

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 3

Profit Maximization

p.248

= TR TC = P.Q wL rK

Q = f (K,L)

p. 270

= P. f (K,L) wL rK
d = Pdf
dL
dL

w = 0

(MPL)(MR) = MRPL = w
d = Pdf
dK
dK

r = 0

(MPK)(MR) = MRPK = r

P is constant P = MR

MPL

MPK

MPL

MPK

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

r
Slide 4

Optimal Use of Labor

MVPL
TR = P.Q

MRPL = (MPL)(MR)

TR
MR =
Q

p. 236

See: Profit Maximization

(slide 24)
Maximum profits

Optimal amount of L

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 5

Figure 7-1

MC = ATC

p.277
= $60

U-shape of ATC, AVC, MC

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 6

p.46

Profit Maximization
($) 300
TC

Max TR

240
TR
180

is maximum
at Q = 3
MC = MR

MC
120
60
MR

Total loss
is greatest

MR = 0

60
30
0
-30

Profit

-60
Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 7

Perfect Competition: Short-Run Equilibrium

Profits = $10 per unit

Total = $40 MC = MR

BFEC = Loss = $30

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 8

p. 344
Monopoly
Short-Run Equilibrium
Profit = 500 x $3

Q* = 500
P* = $11
P = a bQ
TR = (a bQ) Q
= aQ bQ
MR = dTR/dQ = a 2bQ
2b = 2x slope D curve

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 9

p.345
Monopoly
Long-Run Equilibrium
Profit = CAFB

Q* = 700
P* = $9

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 10

Social Cost of Monopoly

(Deadweight loss under monopoly)
p. 348

(GHT)

EEH = loss to society a less efficient use of resources

(HENT)

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 11

Monopolistic Competition
Long-Run Equilibrium
Profit = 0

at Q = 4
P = $6
Break even

At E Perfectly compet mkt

Figure 8-10
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 12

Monopolistic Competition
Long-Run Equilibrium p. 352
D and MR are higher then D and MR before selling efforts see Figure 8-10
Break even
at A*

Cost with selling expenses

Cost without selling expenses

Figure 8-11
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 13