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• 𝐷𝑓
𝑃𝑚
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𝑇𝑅 = 𝑃 𝑋 𝑄
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𝑇𝑅 𝑃.𝑄
𝐴𝑅 = = 𝐴𝑅 = 𝑃
𝑄 𝑄
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∆𝑇𝑅 ∆(𝑃𝑄) 𝑃∆𝑄
𝑅= = = =𝑃
∆𝑄 ∆𝑄 ∆𝑄
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𝐴𝑅 = 𝑀𝑅 = 𝑃 = 𝐷𝑓
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𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
𝜋 = 𝑇𝑅 − 𝑇𝐶
𝜋 = 𝑝𝑞 − 𝐴𝐶. 𝑞 = 𝑞(𝑝 − 𝐴𝐶)
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Output Price Total revenue Total cost Profit
0 $35 $0 $40 $-40
1 35 35 68 -33
2 35 70 88 -18
3 35 105 104 1
4 35 140 118 22
5 35 175 130 45
6 35 210 147 41
7 35 245 169 76
8 35 280 199 81
9 35 315 239 76
10 35 350 293 57
Note: The profit maximizing
output level is 𝑄𝑒 because it is at
this output level that the vertical
distance between the TR and TC
curves (or profit) is maximized.
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i) 𝑀𝑅 = 𝑀𝐶
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𝜋 = 𝑇𝑅 − 𝑇𝐶
𝑑𝛱
• Profit,π, =0
𝑑𝑄
𝑑𝛱 𝑑𝑇𝑅 𝑑𝑇𝐶
• = − = 0; 𝑀𝑅 − 𝑀𝐶 = 0
𝑑𝑄 𝑑𝑄 𝑑𝑄
𝑀𝑅 = 𝑀𝐶 … … … … … … … . 𝐹𝑖𝑟𝑠𝑡 𝑂𝑟𝑑𝑒𝑟 𝐶𝑜𝑛𝑑𝑖𝑡𝑖𝑜𝑛 𝐹𝑂𝐶
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𝑑2 𝛱 𝑑2 𝛱 𝑑 2 𝑇𝑅 𝑑 2 𝑇𝐶
<0 = − 2 < 0,
𝑑𝑄2 𝑑𝑄2 𝑑𝑄2 𝑑𝑄
𝑑𝑀𝑅 𝑑𝑀𝐶
⇒ − <0
𝑑𝑄 𝑑𝑄
𝑑𝑀𝑅 𝑑𝑀𝐶
= 𝑆𝑙𝑜𝑝𝑒 𝑜𝑓 𝑀𝑅 = 𝑆𝑙𝑜𝑝𝑒 𝑜𝑓 𝑀𝐶
𝑑𝑄 𝑑𝑄
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• 𝑀𝐶 > 0
• 𝑄𝑒 𝑀𝐶 = 𝑀𝑅
• 𝑄∗ , 𝑀𝐶 = 𝑀𝑅
Graphically, the
marginal approach can
be shown as follows.
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𝜋 = 𝑇𝑅 − 𝑇𝐶
𝜋 = 𝑝𝑞 − 𝐴𝐶. 𝑞 = 𝑞(𝑝 − 𝐴𝐶)
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• The equilibriu is wher MC
crosses MR from below.
• Total cost = AC. Qe
• Total revenue = P. Qe
• The Shaded rectangle is
the size of the abnormal
profit.
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• 𝑃 = 𝐴𝑉𝐶
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TC = 2 + 10𝑄 − 4𝑄2 + 𝑄3
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• P = $10 TC = 2 + 10𝑄 − 4𝑄2 + 𝑄3
i) 𝑀𝐶 = 𝑀𝑅
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𝑑𝑇𝑅 𝑑𝑃∗𝑄 𝑑(10𝑄)
• MR = = = = 10
𝑑𝑄 𝑑𝑄 𝑑𝑄
𝑑𝑇𝐶 𝑑(2+10𝑄−4𝑄2 +𝑄3 )
MC = = = 10 − 8𝑄 + 3𝑄2
𝑑𝑄 𝑑𝑄
• 𝑀𝐶 = 𝑀𝑅
10 − 8𝑄 + 3𝑄2 = 10
𝑄(−8 + 3𝑄) = 0
3𝑄 = 8 𝑄=0
8
Q= 𝑄=0
3
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𝑑𝑀𝐶
MC = = −8 + 6𝑄
𝑑𝑄
• 𝑞 = 0
• 𝑞 = 0
• 𝑞 = 8/3
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• 𝒒 = 𝟖/𝟑
𝟖 𝟖 𝟑
𝐓𝐂 = 𝟐 + 𝟏𝟎( ) − 𝟒(𝟖/𝟑)𝟐 + = 𝟏𝟗. 𝟏𝟖
𝟑 𝟑
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𝚷 = 𝑻𝑹 − 𝑻𝑪
𝚷=
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𝑑𝐴𝑉𝐶
• =0
𝑑𝑄
• TC = 2 + 10𝑄 − 4𝑄2 + 𝑄3
• TVC = 10𝑄 − 4𝑄2 + 𝑄3
𝑇𝑉𝐶 10𝑄 − 4𝑄2 + 𝑄3
• AVC = = = 10 − 4𝑄 + 𝑄2
𝑄 𝑄
𝑑𝐴𝑉𝐶 𝑑(10 − 4𝑄 + 𝑄2 )
= = −4 + 2Q = 0
𝑑𝑄 𝑑𝑄
𝑄=2
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𝑅 = 4𝑄 𝑇𝐶 = 𝑄3 − 7𝑄2 + 12𝑄 + 5.
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Fig. A natural monopoly
• The monopolist is the industry and has the
demand curve D1.
• The monopolist is able to make abnormal
profits by producing an output between q1
and q2 because average revenue (AR) is
above the LRAC for that range of output.
• If another firm were to enter the industry,
then the firm would take demand from the
monopolist and the monopolist’s demand
curve
would shift to the left, in this case to D2.
• The LRAC for the two firms would be above
AR at every level of output, both making
losses.
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