Microeconomics - Chapter 19 : Profit Maximization

What must be taken into account when conducting short-run profit maximization?

At least one factor will be fixed, and the value of the marginal product of a factor (pMP) should equal its price.

What is a quasi-fixed factor and what holds true for fixed factors in the long run?

Quasi-fixed factor: A factor that must be used in a fixed amount, independent of the output of the firm, as long as the output is positive. Example: electricity In the long run, all factors are variable

What is the economic definition of profit?

Revenues minus costs, but taking into account all inputs and outputs at their opportunity cost.

Explain why the only feasible level of profit for a competitive firm in the long run is zero.

If a firm experience positive profits in a perfectly competitive industry, then it must be possible for a newcomer to attain positive profits as well. This will push profits in the industry down to zero.

What should the value of the marginal product of a factor (pMP) be equal to at the profit maximizing level in the short run?

It should be equal to its price, w.

What should a firm do when considering whether to produce something or buy it instead?

It should evaluate which option is cheaper and choose the most cost effective one.

How do you calculate the technical rate of substitution? What is significant about this?

TRS(1,2) = -MP1/MP2 = w1/w2 This is also the cost minimizing level of factor inputs