Exam #3 Micro Chapter 14

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total revenue

Price x Quantity

Change in Profit

MR-MC

Shut down if (2)

P<AVC (price of a good is less than the average variable cost of production)

competitve market

Sometimes called a perfectly competitive market, has two characteristics: there are many buyers and sellers in the market. The goods offered by the various sellers are largely the same.

Exit if (1)

TR/Q < TC/Q

Exit if

TR/Q is average revenue, which equals the price P, and that TC/Q is average total cost, ATC. Therefore the firms exit rule is P<ATC

Shut down if

TR<VC( total revenue is less than variable cost)

Average Total Cost curve

U-shaped

Marginal cost curve

crosses the average total cost curve at the minimum of the average total cost

Three general rules for profit maximization

if marginal revenue is greater than marginal cost, the first should increase its output. if marginal cost is greater than marginal revenue, the firm should decrease its output. At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal.

exit

refers to a long-run decision to leave the market. (does not have to pay any costs, fixed or variable.)

shut down

refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. (still has to pay its fixed costs)

marginal revenue

the change in total revenue from an additional unit sold

profit maximization

the firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue

average revenue

total revenue divided by the quantity sold

profit

total revenue minus total cost

third condition of perfectly competitive markets

Firms can freely enter or exit the market.

price takers

Buyers and sellers in a competitive market that must accept the price that the market determines.

firm exits if

Total revenue is less than total cost

sunk cost

a cost that has already been committed and cannot be recovered. "dont cry over spilt milk" "let bygones be bygones"

marginal cost curve

a graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced. upward-sloping


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