4. The Firm’s Production and Selling Decisions. Outline. Production and Input Choice, with One Variable Input Multiple Input Decisions: The Choice of Optimal Input Combinations Cost and Its Dependence on Output Economies of Scale. Outline. Price and Quantity: One Decision, Not Two
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The Firm’s Production and Selling Decisions
Can you think of one?
Consider purchasing just 1 bag of corn. Does this max profits?
TR: $0.75 x 14 = $10.50
TC: $10 x 1 = $10.00
Profit: = $0.50
TR: $0.75 x 36 = $27.00
TC: $10 x 2 = $20.00
Profit: = $7.00
If MRP < P of an input → use less of the input.
Can you explain why she should not buy the 8th bag?
How much of each input should Flo purchase?
i.e., 50/$20 < 30/$10
TC 99 lbs. = $39.70
MC 100th lb. = $0.30
AC and MC typically ↓ and then ↑ as the ↑output level.
What are the fixed and variable costs where you work?
Flo pays rent of $5 per week for her chicken coop.
If Flo produces 1 package, TFC is carried by 1. But if she produces 4, TFC gets divided between 4 packages. So ↓AFC as ↑output.
TVC has same shape as TC because ↑variable costs as ↑output.
Why doesn't MC have a fixed component (i.e., MC = MVC + MFC)?
Flo faces a local D curve.
If she picks P = $19 → Qd = 1.
If she picks Q = 9 → P = $11 to find required # of customers.
Price per package
Quantity of Chicken (20 lb-packages per week)
if marginal Π < 0 → ↓Q
Total Profit “hill”
Total Profit per week ($)
Output, Packages per week
Total profit has a “hill” shape. At Q = 0, Π = 0. At larger Q levels, firm floods the market, and ↓Π. Only at intermediate Q levels is Π > 0.
if MR < MC → Q