A profit-maximising firm faces a downward-sloping demand curve for its output and has marginal costs that increase with output.Explain why a single firm might face downward-sloping demand.Explain why, as Q increases, marginal revenue will decline more quickly than demand. Illustrate this with a sketch. Add marginal cost to your sketch and show the point of profit maximisation.The firm’s demand function is P = 100 - ½Q. Find its marginal revenue function.The firm’s cost function is C = 400 + Q + ¼Q2. Find its marginal cost function.Hence find the firm’s profit-maximising level of production.Now assume the firm is a typical firm in a perfectly competitive market. Explain why Q would be higher. Show in your sketch where there is an efficiency gain over the situation in part (b).Assume an initial equilibrium in which the firm in part (b) is earning excess profits. Explain how this excess profit will be reduced to normal profit, in the long run. Use your diagram in your explanation.

A single firm might face a downward-sloping demand curve because of the law of demand, which states…

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14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A profit-maximising firm faces a downward-sloping demand curve for its output and has marginal costs that increase with output.
Explain why a single firm might face downward-sloping demand.
Explain why, as Q increases, marginal revenue will decline more quickly than demand. Illustrate this with a sketch. Add marginal cost to your sketch and show the point of profit maximisation.
The firm’s demand function is P = 100 - ½Q. Find its marginal revenue function.
The firm’s cost function is C = 400 + Q + ¼Q². Find its marginal cost function.
Hence find the firm’s profit-maximising level of production.
Now assume the firm is a typical firm in a perfectly competitive market. Explain why Q would be higher. Show in your sketch where there is an efficiency gain over the situation in part (b).
Assume an initial equilibrium in which the firm in part (b) is earning excess profits. Explain how this excess profit will be reduced to normal profit, in the long run. Use your diagram in your explanation.