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ECON2410 Lecture Notes - Lecture 1: Average Variable Cost, Marginal Cost, Marginal Product

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School
UQ
Department
Economics
Course
ECON2410
Professor
Dr Temesgen Kifle

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Document Summary

Lecture 1: introduction & economics primer (part a) Microeconomics is based on an assumption that firms will maximize profit. Profit ( ) = total revenue (r) total cost (c) C(q) = total cost of producing q units of a good or service. The total cost function represents the relationship between a firm"s total costs and the total amount of output it produces in a given time period. Tc (q) shows the total costs that the firm would incur for a level of output q. Is an efficiency relationship that shows the lowest possible total cost the firm would incur to produce a level of output. If the firm is producing efficiently, the total cost function must slope upward (using more factors of production, like labour and capital). Average costs could go down as output goes up. Fixed costs costs that do not change with an increase or decrease in the amount of goods or services produced.

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Related Questions

PROFIT MAXIMIZATION

Reminders:

Q: Quantity, TC: Total Costs, VC: Variable Costs, MC: Marginal Costs, MR: Marginal Revenue, TR: Total Revenue

1. Suppose the market for DVD movies is perfectly competitive. The industry price for the movies is $24, and a typical firm has the following total cost data:

Q

TC

VC

MC

MR

TR

Net Profit

0

10

1

33

2

53

3

70

4

90

5

114

6

143

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

2. Now suppose that some firms have been able to differentiate their DVDs, and the market has become monopolistically competitive. A typical firm now has the following demand schedule and total cost data:

Q

P

TC

VC

MC

MR

TR

Net Profit

0

40

8

1

35

20

2

30

28

3

25

40

4

20

56

5

15

76

6

10

100

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

Question:

Evaluate the following statement:

In the short-run, information about a perfectly competitive firm's fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Answer:

The profit-maximizing level of output in a perfectly competitive market is determined at the level where marginal revenue (MR) equals marginal cost (MC). Marginal revenue is the additional revenue earned by selling an additional unit of output, while marginal cost is the additional cost of producing an additional unit of output (Farnham, 2014). Additionally, in order to find the amount of profit earned, we need to know the total cost and total revenue amounts. Total cost is the total of variable and fixed cost. Therefore, in short-run production, a firm's fixed cost is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Farnham, P (2014) Economics for Managers 3rd edition

~Beth

I need a peer reply for this, please.

Question:

Evaluate the following statement:

In the short-run, information about a perfectly competitive firm's fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output.

Answer:

The objective of a firm is to maximize profits. In determining output, the firm may be subject to two constraints: costs of production and consumer demand. The price that a perfectly competitive firm may sell its products, is determined by consumer demand. Production costs are determined by the technology used. Profits are the difference between total revenues and total costs. Pertaining to short-run profit maximization, firms maximize profits by choosing the output level where its marginal revenue equals its marginal cost.

Farnham, P. G. (2014). Economics for Managers (3rd Ed.).

I need a peer reply for this, please.