1. Business Economics The Behavior of Firms

2. Assumption: Profit Maximization Problem: You have 6 acres of land and you are deciding how many acres to spray with insecticide-Variable costs but no fixed cost 3159 41812 52015 62118 6 6 5 3 43 33 23 13 Acres Sprayed Total Benefit Total Cost 000 Net Gain 0 1633 Marginal Benefit Marginal Cost -- 63 2116553

3. Profit Maximization Total Benefits Total Cost6 6

4. Profit Maximization Marginal Cost Marginal Benefit

5. Profit Maximization Total Benefit=5+10ln(acre) Marginal Benefit=10/acre Total Cost=3(acre) Marginal cost=3 Marginal Benefit=Marginal Cost 10/acres=3 acres=10/3 Net Gain=Total Benefit-Total Cost Choose acre to: Max{Net Gain}=Max{5+10ln(acre)-3(acre)} First Order Condition (10/acre)-3=0 Second Order Condition -10/(acre^2)<0

6. Maximizing Profits Total Benefits Total Costs Net Gain Max

7. Maximizing Profits Marginal Benefits= 10/acres Marginal Costs=3

8. Profit Maximization Fix Cost of $4 21110 31513 41816 52019 62122 1 2 2 1 53 43 33 23 13 Acres Sprayed Total Benefit Total Cost 004 Net Gain -4 167 Marginal Benefit Marginal Cost -- 63

9. Profit Maximization

10. Marginal Cost Marginal Benefit

11. Profit Maximization Fix cost of $10 21116 31519 41822 52025 62128 -5 -4 -5 -7 53 43 33 23 13 Acres Sprayed Total Benefit Total Cost 0010 Net Gain -10 1613-7 Marginal Benefit Marginal Cost -- 63

12. Profit Maximization

13. Marginal Rule If it is worth to produce at all, then it should be produced up to the point where marginal costs are equal to marginal benefits

14. Revenues Revenues= Price X Quantity PriceQuantity Demanded Total Revenue 0 $101 9218 8324 7428 6530 56 4728 3824

15. Revenue D2D2 Price Quantity P Q P’ Q’ Should firms maximize revenues?

16. Profit Maximization PriceQuantityTotal Revenue Marginal Revenue 0 $101 10 92188 83246 74284 65302 56 0 4728-2 3824-4 Total Cost Marginal Cost Profit 2 317 5213 8316 12416 17513 2367 307-2 388-14

17. Change on Fixed Costs Total Costs $ Quantity Fixed Cost 1 Fixed Cost 2 Total Cost 2 Total Cost 1 Total Revenue Q* Total Cost 3

18. Change on Variable Costs Total Costs $ Quantity Fixed Cost Total Cost 2 Total Cost 1 Total Revenue Q*Q**

19. Marginal Costs and Revenues $ per (last) unit Quantity Marginal Revenue Marginal Cost 2 Marginal Cost 1 Q**Q*

20. Fixed Costs & Sunk Costs We will call fixed costs to costs that do not change with the level of production and are avoidable by closing the firm (exit the market). Sunk costs are costs that do not change with the level of production and are not avoidable by closing the firm.