ECO 304K Lecture Notes - Lecture 7: Oligopoly, Marginal Cost, Marginal Revenue
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ECO 304K Full Course Notes
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To maximize profit, keep increasing production as long as marginal revenue is greater than marginal cost. At the optimal q*, marginal cost = marginal revenue. For a competitive, marginal revenue = price, so marginal cost = price at q*. What if p* is less than the minimum average total cost. If p* is less than the minimum average total cost, firm faces a two-step decision in the short run: If it produces, how much: we already know the answer where marginal cost equals p* Produce in the short run if p* is greater than the minimum average variable cost. In the short run, ignore the fixed cost. Shut down if p* is less than the minimum average variable cost. In the long run if p* is less than the minimum average total cost, firm should exit. When the price is greater than the average total cost minimum.
