Question

Explain each of the best conditions in the issue of corporate profit maximization and cost minimization.



Compare and explain the balance conditions of the fully competitive market and the balance of the Cournot and Bertrand in the oligopoly model.

Answer 1

The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.

The Cost-Minimization Rule

Cost is minimized at the levels of capital and labor such that the marginal product of labor divided by the wage (w) is equal to the marginal product of capital divided by the rental price of capital (r)

In fully competitive market, a firm produces a homogeneous product at price where it is equal to Marginal Cost. Meaning their by earning just normal profits.

Both are oligopoly models in which firms produce a homogeneous good. ... The difference between the two is that in the Bertrand model firms end up producing where price equals marginal cost, whereas in the Cournot model the firms will produce more than the monopoly output but less than the competitive output.

Secondly, in Bertrand model homogeneous product results in zero profits, whereas homogeneous product results in positive profits for the Cournot model. This comes about due to the fact, at equilibrium; price equals marginal cost under Bertrand competition, while price is above marginal cost under Cournot competition.