FIN 311 UO Midterm 2

Profit maximization in the LR

A firm will choose to produce where LMC=P

Average and marginal costs

MC = ATC at the minimum ATC. For MC greater than ATC, ATC rises. For MC less than ATC, ATC falls

MRP Definition

Marginal revenue product measures the amount that an additional unit of the variable input adds to total revenues.

Profit Margin formula

P-ATC

SHORT RUN: The firm will shutdown as long as

TR<TVC or P<AVC If the price falls below the shutdown point, revenues fail to cover the fixed costs and the variable costs. The contribution margin is negative. The firm would be better off if it shut down and just paid its fixed costs. Losses will equal fixed cost

if firms are making a loss, it will continue to produce in Short run as long as

TR>TVC or P>AVC

Diseconomies of scale

exist when long−run average cost increases as output increases.

In a competitive industry the market-determined price is $12. A firm is currently producing 50 units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. In order to maximize profit, the firm should:

produce less because the last unit of output decreased profit by $3

If a perfectly competitive firm incurs an economic loss, it should

shut down if this loss exceeds fixed cost

The main difference between the price-quantity graph of a perfectly competitive firm and a monopoly is

that the competitive firm's demand curve is horizontal, while that of the monopoly is downward sloping.

MC = ATC at ...

the minimum ATC.

At P > MC an increase in output ... At P < MC a decrease in output will ...

will increase revenues more than costs. save more in costs than is lost in revenues.