ECON 1110 Lecture Notes - Lecture 11: Marginal Revenue, Average Variable Cost, Marginal Cost

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magentaherring519

4 Feb 2016

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Lecture #11 long run costs and output decisions september 29, In the long run: firm is not operating under a fixed scale (fixed factor) of, new firms can enter and existing firms can exit the industry production. In the long run maximizing profits: profit maximizing point - where mc=mr that actual revenue brought in by making that last unit just covers the cost of producing that last unit. To minimize losses in short run choose level of output where horizontal mr (which is also price) intersects atc at its lowest. The long run at prices below average variable cost, it pays a firm to shut down rather than to continue operating. The short run supply curve of a firm operating in a perfectly competitive environment is the part of its marginal cost curve that lies above its average variable cost curve (mr=p=d) Short run industry supply curve (horizontal summation of firms)

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1. If the price faced by a competitive firm is greater than its average variable cost, the firm:

a. should produce the output level where P=MC and it is making a positive profit
b. should produce that output level where P=MC and it is incurring loss
c. should produce that output level where P=MC and it may make a positive profit or incur a loss
d. none of the above

2. When a firm in perfect competition is maximizing profits and produces that level of output where price, marginal revenue, marginal cost, average total cost, long-run marginal cost, and long run average total cost are all equal, the firm:

a. earns a positive economic profit and it serves to signal other competing firms to enter the market
b. earns a positive economic profit that can be continued in the long run
c. earns zero economic profit and is in a long run equilibrium
d. incurs a loss and will shut own in the long run

emeraldrat340

Answer the following Questions for a Monopoly Firm.

Price	Quantity	TR	MR	MC	TC	Profit
$400	0				$2,000
390	1			$200
380	2				2,360
370	3				2,500
360	4
350	5				2,720
340	6
330	7				3,060
320	8			$250
310	9				3,630
300	10			$400
290	11			$500

a) Fill in the missing information above for this Monopoly Firm. Note there are no numbers for MC and MR when Q=0.

To complete the table you need to know that the ATC of producing 4 units of output is $650 and that the Total Variable Cost of producing 6 units of output is $870.

b) State the Total Fixed Cost for this firm. Please explain how you got your answer.

c) At which unit of output does Diminishing Marginal Returns start? Please explain your answer.

d) If this firm produces in the Short Run, determine its profit maximizing/loss minimizing output level. Please explain your answer using MC and MR.

e) If this firm produces in the Short Run, determine its profit maximizing/loss minimizing price.

f) If this firm produces in the Short Run, state its profit maximizing/loss minimizing profit amount.

g) If this firm shuts down in the Short Run, determine its profit maximizing/loss minimizing profit amount. Please explain your answer.

h) What should this firm do in the Short Run in order to maximize its profits/minimize its loss (produce or shut down)? Please explain your answer using numbers.

i) Explain what this firm should do in the Long Run.

raspberryhorse277

QUESTION 22

For a perfectly competitive firm, profit maximization (or loss minimization) occurs at the level of output at which

	a.	MR = MC.
	b.	MR = AVC.
	c.	P = ATC.
	d.	MR = ATC.

4 points

QUESTION 23

If MR > MC, then

	a.	profits are being maximized.
	b.	the firm is producing too much of the good to be maximizing profits.
	c.	the firm can increase its profits (or minimize its losses) by increasing output.
	d.	the firm must be incurring losses.

4 points

QUESTION 24

If firms are earning zero economic profits, they must be producing at an output level at which

	a.	price minus marginal cost.
	b.	total revenue equals total costs, in other words, normal profits.
	c.	price equals average variable cost.
	d.	marginal revenue equals marginal cost.
	e.	none of the above

4 points

QUESTION 25

In the theory of perfect competition,

	a.	the market demand curve is horizontal.
	b.	the single firm faces a horizontal demand curve.
	c.	the single firm faces a downward-sloping demand curve.
	d.	the market demand curve is downward sloping.
	e.	b and d

azureshark954

ECON 1110 Lecture Notes - Lecture 11: Marginal Revenue, Average Variable Cost, Marginal Cost

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