micro chapter 14

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what is the difference between a shut down and an exit?

- a shutdown refers to a short run decision not to produce anything during a specific period of time bc of current market conditions - an exit refers to a long run decision to leave the market

marginal revenue

- change in total revenue / change in quantity sold - the change in total revenue from an additional unit sold

competitive market

- many buyers and sellers trading identical goods - individually have no effect on price - firms can freely enter or exit the market

what are 3 rules of profit maximization?

1) if marginal revenue is greater than marginal cost, the firm should increase its output 2) if marginal cost is greater than marginal revenue, the firm should decrease its output 3) at the profit maximizing level of output, marginal revenue and marginal cost are EQUAL

sunk cost

a cost that has already been committed and cannot be recovered (spilt milk)...IRRELEVANT

why would a firm long-run exit/enter the market?

a firm should exit if total revenue < total cost. a firm should exit if (total revenue/quantity) < (total cost/quantity). a firm should exit if price < average total cost. a firm should ENTER if price > average total costs.

why would a firm shut down in the short-run?

a firm should shut down if total revenue < variable costs. a firm should shut down if (total revenue/quantity) < (variable costs/quantity). a firm should shut down if price < average variable costs.

where is profit on a graph w/ average total cost and marginal cost?

if the marginal cost and the atc curve intersect above the quantity, it is a loss. if the marginal cost and atc curves intersect below the quantity, it is a profit. the shape is a rectangle from price to where it intersects with the atc curve. the long side is from 0 to the quantity.

supply curve and shut down

in the short run, the firm produces on the marginal cost curve if price > average variable cost, but should shut down if price < average variable cost

what is the change in profit?

marginal revenue - marginal cost

what is the price of a good?

the firm's average revenue and its marginal revenue

what is the goal of a competitive firm?

to maximize profit

average revenue

total revenue (price x quantity) / quantity sold

what is the profit maximizing quantity?

where atc and marginal cost intersect

what is the lowest possible level of output?

where marginal cost and avc intersect


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