Section D = Objective of Firms See 1 Profit Maximization #1785 A(t un Hams’ major objective is to maxi hey would follow the rule where Marginal Revenue = Marginal Cost (MAmmag6) to decide heamamaguansisy of products they woud keto produce, rR ER YR RINRE DC —PRORAS (MR = MIC) ESSER 18 SEHR S PA + 2 ss > Find the profit maximizing output MR = MC > SR FLIBEA LIE (Total variable cost + Total fixed cost) wig: Ten cL [AUR = HLS — ERR (ERTIROC + MELE refers to the extra cost of production created when one more unit of output is produced. Barge OAC IC eo — aR MLA EE RINE MC =TCq-TCas oF TVCq~TWCo1 = Price PUM) = EB herefore, the marginal revenue (MR) be fixed at the unit product price. ‘As a price-taking firm, price is fixed. Tr + ee Samael Feri pebees (MR) under every quantity of production would fe — RARER » UAL « BER - Steps EE Total Cost/ Total variable cost > Neaspiasiooe® RA METRE? MMR 2 Paceaaite ROIS mg > igen + MR= MC-> determine the profit wanaimisinsreman Savas = SMSC: (MR = MC) > ESE FUERA (EERE + Total Profit = Total Revenue ~ Total Cost URE = sick - AR + Producer surplus = Total Revenue ~ Total variable cost ERA = sss - roy HDSE Economics. Co SEK Copyrighted by Prominent Education Centre, 2021-2022Section ~ Objective of Firms. Revision Notes ‘Advanced Skills #55 The rule for finding out profit maximizing output_MP = jt _ mum e: MR = MC Example 1 The following table shows the output and cost relationship of a perfectly competitive firm. Find the profit maxi izing output “Fea T 1S GEL TOA «AREA EH « uanty (ais Margral oat] Bice Wargina Revenue La mea ire) meas 0 t L I 10 30 2 20 30. 5 30 30 4 20 30 5 50 30 The profit maximizing output is at ___3___ units because marginal revenue ‘equals to marginal cost at this output level AA (GE ___¥i(tr» RIAsLEUDICP evinces =i» HKOSE Economics. Copytghted by Prominent Eduction Centre, 2021-2022 2Section 9 = Objective of Firs Revison Note ‘Advanced Skills 2% Use total cost to calculate marginal cost PIN MPR Example 2 ‘The following table shows the output and cost relationship of a perfectly competitive firm, Ete TT (a a A FAM + ‘Quantity (units) Total cost ‘Warginal Cost | Marginal Revenue Ean stk ama iB / was 0 0 / 7 T 30 bo t a 150 100 Dee 3 300. 1s" Pag 4 500. 700 we 3 750 ra wee Suppose the price of the good is set at $200. (@)_ Find the profit maximizing output. (©) Calculate the profit atthe profit maximizing output. Show your working The profit maximizing output is at __‘t___units because marginal revenue equals to marginal cost at this output level (va? (©) Profit = total revenue total cost = (4x 200)- 500 = 300 @ ALE TAVMIBRLE A 200 7 + (a) SADLER (Letom (b) SHMLFUPEREAC(aeCU RMR + ULE + () AURA (EMSAs fir» BRA KS = PR * AR = set eo HKDSE Economics. Copyrighted by Prominent Education Centre, 2021-2022‘Section D ~ Objective of Firms ‘Advanced Skills 65% ‘the total cost is the fixed cost. ABI ERA + Example 4 Me Chan is a producer in a price-taking market. The following table ‘shows his ppraduction information. Assume the price of good is $50. Pr IS RB AR Lee ae » ARMM ME RAR RE A ILASS50 « “Gatput units) | Total Cost (&) | Marginal Cost (8) | Marginal Revenue ($) aucRm | mais) aan (8) Tent) 0 30, 7 xo 1 40 te 30. 2 60. ze 7 3 30 30 oo 4 130 40 50 5 380 5 im 6 240 Ge ° (@) Find out the profit maximizing output {b) Calculate the profit at the profit maximizing output. Show your working. (© Calculate the producer surplus at the profit maximizing output. Show your working, (@) The profit maximizing output is at _7__units because. marginal reverie equals to marginal cost at this output level. (b) Profit = total revenue - total cost = (5¥30)- Ie = po (© Producer Surplus (@ Rubelast fem « (>) SF RRFIRER A Lamune - muna RR » (2) SeRFIRER Ceara amee + SILT + () FURRA(eariis _ it» pays Pe am aS =I + ©) AU = tebes— sera = - (© Semetmee = amleas - eer = = HXOSE Economics. Copyrighted by Prominent Education Cente, 2021-2022 . Revision NotesSection D~ Objective of Firms Revision Notes Advanced Skills fii 1. MacgiaaisGaats the aditiona cos (veil when one mote unit of products produced SIERRA S— Ml EHO CAIN) « 2, Total Variable Cost isthe sum of Marginal Cost Serr RRMA « weMc= ve Example 5 Mr. Chan is a producer in a price-taking market. The following table shows his production information. Assume the price of good is $250 and the fixed cost is $100. RAE — 5 SB TAR. «RAT AER» ABE 258250 + (Bit H$100 » Output | Marginal Cost | Marginal] Total Variable] Total Cot (®) (units) ®) Revenue($) | Costs) sere) ees Biny | samme (6) | imomcas (6) | swarms) 0 7 7 0 Too T 30) 390 © 138 2 300 200 Too 00 3 150-350 ie 250 4 200 250 208 00 5 250 350 rs 7 (@)__ Find out the profit maximizing output. (©) Calculate the profit at the profit maximizing output. Show your working (©) Calculate the producer surplus at the profit maximizing output. Show your working (2) The profit maximizing output is at __7 Units because marginal revenue equals to marginal cost at this output level 3 = = 7 - ©) hot Decrease in fixed cost FEDER /— REE AA RAE = Change in fixed cost will not affect marginal cost > profit maximizing ‘output remains unchanged. EAR A ARPA ALR eA Change in variable cost M¥Rpk Az *+ Increase in variable cost/ per-unit tax > Increase in marginal cost Sam aR / ERAT PR, = You need to add the changed cost to the MC under every unit of output. ARES EL Lt WER « ‘Decrease in variable cost/ per-unit subsidy -> Decrease in marginal cost REICETRRCK HERR > REESE AE = Change in variable cost will affect marginal cost > profit-maximizing output will change. Be IA PRA CE Nenorinitad CE ‘Ses war Nesieblecoss amieme | Bee Some Wiarginal Revenue (Price) x x v ses (et8) ‘Marginal Cost (MC) x ¥ x seine - Profit maximizing output y v v UE (Lam Fixed Cost (FO) y x x ism Profit y v y aH Producer Surplus x q v prea bee V> will change sz X-> will remain unchanged HEF OSE Economics. Copyrighted by Prominent Edcation Centre, 2021-2022 8Revision Notes Section = Objective of Firms oe 4 producer in a price-taking market. The following table shows his precton information. Assume the’ lamof good isi, Datuk cunts) | Total Cost (S) | Marginal Cost (5) 0 30 / 1 40 10 2 60 20 ; = 30 wHerUt 4 130. 40 = 180 we i 0 7 (@) Find the new profit maximization output and calculate the new profit and producer surplus. how your working (©) Suppose the lump-sum (fixed) cast of production (RONSE>y SHB Find the ew profit remimizaioncauiais and calculate the REGEBFIM and producer surplus. ow your working When marginal revenue equals to marginal cost (MR=MC), the firm will be producing ais proft maximizing output. So, the profit maximizing output is Warits of output Profit. = Tota revenue ~ Total cost = 550-180 =$70 Producer surlus = Total revenue - Total variable cost =5*50-(180~ 30) = $100 (©) The marginal cost ofeach unit of production remains unchanged since lump: Sum cost will BBM marginal cost When targinal revenue equals to marginal cost Amb, the firm wil be roducing ais profit maximizing output So, the profit maximizing output is ‘Panits of output co Slates Profit Total revenue - Total cost *5*50~ (180 + 10) $60 S180 fetes to the orginal tot cost before any change in storetersto heen fied cont, Procucer split» Total revenue Total variable cost. = 5"50~ (190-49) 200 ah "RPS Konmes Copied by Monin kaon a, 20213022 :Section D~ Objective of Firms Ane Example 7 Mr. Chan is a producer in a price-taking market. The following table shows his production information. Assume the price of good is $50, [Output Curits) | Total Cost (6) | Marginal Cost @) | New Marginal Cost ( Co 30 T 7 Co 40 10 20 (2 60 20 30 ’ eaieae3) 30 30. 40 a ee a0) 50 a ee 50 Gy [ 6 [ 240 0 70 (@) Find the new profit maximization output and calculate the new profit and producer surplus. Show your working. (©) Suppose the marginal (variable) cost of production increases by $10, Find the new profit manimrization output and calculate the new profit and producer surplus. Show yout working (@) When marginal revenue equals to marginal cost (MR=MO, the firm will be producing at its profit maximizing output. So, the profit maxirizing output is 5 units of output. Profit = Total revenue - Total cost = 5750-180 = $70 Producer surplus = Total revenue ~ Total variable cost =5*50- (180-30) % e (©) The marginal cost of each unit of production increases by $10. ‘When marginal revenue equals to marginal cost (MR=MC), the firm will be producing at its profit maximizing output. So, the profit maximizing output is 4 units of output. ‘S130 fers tothe oii ta cst before ty change in MC at ne ute uit). (G10 +4 refers tothe era perunit MC ($40) new output units = Total revenue - Total variable cost * 50-~((130~ 30) + (10* 4) ) 60 KOS Economics Copyrighted by Prominent Education Cee, 2021-2022 Fr) rrSection D- Objective of Fis Reson Notes Example 8 Nir Chan if 2 producer in 8 pricetating market. The following table shows his production information. Assume the price of good is $50. mut | Total Cost | Marginal Cost ws | or (8)__| Revenue ) o 30 7 50 1 40 10 50 2 60 20 50. 3 90, 30 50. 4 130 40 50 1 a 180. 50. 50 | 6 240 60 xf (@) Find the new profit maximization output and calculate the new profit and Producer surplus. Show your working, ©) Suppose the price increases by $10 Find the new proft maximization output and calculate the new profit and producer surplus. Show your working, {@) When marginal revenue equals to marginal cost (MR=MC), the fim will be Broducing at its profit maximizing output. So, the profit maximizing output is 5 units of output. Profit. = Total revenue - Total cost 5*50~ 180 Producer surplus = Total revenue - Total variable cost 5*50~(180-30) = $100 : (©) The marginal revenue of each unit of production increases by $10 When marginal revenue equals to marginal cost (MR=MC), the fim will be roducing atts profit maximizing output So, the profit maximizing outputs 6 units of output. Profit = Total revenue ~ Total cost * 60-240 = $120 Producer suplus = Total revenue Total variable cost = 6 60~(240 - 30) = $150 RDS fonomics. Copyrighted by Pominnt Education Cen, 2021-2022 aSecton D - Objective of Fm 1.3 Graphical Presentation fe Bi7 Graphical presentation is_ required in the DSE syllabus. AM TEE OSE HR « MC (VC) eR ac m+ Prot o8 B88 ERTS SB \WKOSE Economic, Copyrighted by Prominent Education Centre, 2071-2022 RRevision Notes Section D~ Objective of Firms ‘Study online: Please visit e-Prominent - “online lesson” to watch the online video lesson ‘When price increases, ‘When price decreases, Price Price Quantity | When magna cotin rainal cost increases, When marginal cost decreases, | | Quantity HOSE Economics. Copy ed by Prominent Education ¢ ire, 2021-2022 fT := Objective of Fis section 0- Ob Revision Notes 2, Marginal Cost Curve = Supply Curve stimiiig= eR The marginal cost schedule of a firm can be interpreted as its supph because we can tel the quantity ofthe god the fm pans to pce for he marginal cost schedule given the price of the good, RLV. CCRT CIRM ERTIES ROURIOOER F SUP eGR erate ROR + ‘Asa price taker, the decision of production depends on the price they are taking. It's because they will produce at the point where MR = MC (ie. P = MC). i fea RSH » Ea ERAT ES Him « sa Peleae = BRA CEOS = IRA) cites Output] Marginal Cost (Variable Cost) | Price | Quantity Supplied ie smears ‘te ere 1 0 0 1 2 20 20 2 3 40 40 3 4 60. 0 4 5 ED 80 3 6 100. 100 6 7 120 120 T 8 140 140 a ‘As a result, the quantity supplied of goods under a perfect competitive firm depends ‘on the price of product. Therefore, it forms a relationship between price and quantity supplied. Therefore S=MC when its @ perfect competitive firm. Re CERF RM UEHARA SS ART IS OO ZY With » GS» SRE PS + LAMAR = PRR AUER by inal cost curve in perfect com, A rational producer would continue to produce when it can have producer surplus continuously. Perfectly competitive firms will keep the price higher than marginal (variable) cost until marginal cost of the last unit is equal to the price. As @ result, roducer is willing to sell the last quantity at which the marginal cost ofthe last unit is equal to the price. As a result, we can tell the quantity of the good the firm plans to Produce from the marginal cost schedule given the price of the good. REEMA RCV RR «RRNA REFS GIR TSR » AERTS HS « SIR EER Hs team ORL RA» + PTT (ONS CEPR Md HRA Cs st IEEE « HKDSE Economics. Copyrighted by Prominent Education Centre, 2021-2022 4Section D- Objective of Fes Revion Notes 3. Implication of profit maximization theories #155 A (LUSH © Total revenue > Total Cost s#ibi26 > Mindat Profits positive. ‘The firm will continue to operate, URIBIERE ASAE + Example Total revenue: $12 000 Fixed cost! $7 000 Variable cost: $3000 Total cost: $1000 Profit = Total revenue total cost $12 000 - $10 000 = $2000 © Total revenue < Total Cost (but Total revenue > Total Variable cost) eas < eB (eb > TBR) Profit is negate while producer |The frm may continue to operate, surplus is stl positive The loss will be higher if they shut FUMMEARITTM a REROYRIER- | down the business because the firm still needs to bear the fixed cost if it does not operate SSIES » SOR PINE BH RATER ABORT ORR IMENT Example Total revenue: $12 000 Fired cost’ $8 000 Variable cost: $6000 Totalcost $14 000 ‘© Ifthe firm does not operate, there will be no variable cost, but the firm still needs to bear the fixed cost. SORA MUTE IRAE + LATOR RIBERA + Profit = Total revenue — total cost 0 - $8 000 $8000 # Ifthe firm continues to operate, down the business, SORA ARSE » HEH MEARE the loss would be lower than closing poe [2000- Gore Profit. = Total revenue — total cost = f Goo 12 000 - $14 000 $2000 'HKOSE Economic. Copytghted by Prominent Education Centre, 2021-2022 sSection ~ Objective of Firs © Total revenue < Total Cost (but Total revenue < Total Vi Aas < BARRA (Has 0B ARRAS RTT IER: « RRL BE Corporate social responsiblity includes safety products, environment protection, labor training, labor benefits, and charity activities, CLO ME Am «EER. POS SOARS ae -