ECON10004 Lecture Notes - Lecture 8: Average Variable Cost, Marginal Revenue, Marginal Cost

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OC2445316

12 May 2018

School

University of Melbourne

Department

Economics

Course

ECON10004

Professor

Eik Lee

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Microeconomics Week 8

CHAPTER 14: FIRMS IN COMPETITIVE MARKETS

Competitive Markets:

• Many buyers and sellers

• Goods offered are largely the same

• Firms can free enter/exit market in long run (this characteristic thought to

characterise perfectly competitive markets)

Price takes: a buyer or seller who takes the price as given by market condition

The Revenue of a Competitive Firm

Average Revenue: the total revenue divided by quantity sold

Marginal Revenue: the change in total revenue from an additional unit sold

Profit Maiisatio ad Copetitie Fir’s “uppl Cure

The Marginal-Cost Cure ad the Fir’s “uppl Deisio

• Marginal Cost (MC) curve is upward-sloping

• Average Total Cost (ATC) curve is U shaped

• MC = ATC at minimum of ATC

• Price lie is horizotal eause the fir is a prie taker; prie of fir’s output the

same regardless of quantity produced

o ∴ price also = average revenue and marginal revenue

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The Fir’s “hort-Run Decision to Shut Down

Shutdown: a short-run decision to produce nothing for a specific period of time

Exit: a long-run decision to leave the market

• Firm can only avoid fixed costs when it exists

• Firm shuts down if total revenue from producing is less than variable costs of

production:

o TR < VC

o TR/Q < VC/Q, TR/Q is average revenue which is price P, VC/Q is AVC

o P < AVC

• Fir should’t produe if prie a’t oer aerage ariale osts

• Would still incur fixed costs but would lose even more by staying open

Sunk Cost: a cost that has already been committed and cannot be recovered

The Fir’s Log-Run Decision to Exit or Enter a Market

• Firm exits if revenue is less than total costs

o TR < TC

o TR/Q < TC/Q, TR is average revenue which is price P, TC/Q is ATC

o P < ATC

• Firm exists if price of good is less than average total costs of production

• For someone to enter a market P > ATC

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Document Summary

Competitive markets: many buyers and sellers, goods offered are largely the same, firms can free enter/exit market in long run (this characteristic thought to characterise perfectly competitive markets) Price takes: a buyer or seller who takes the price as given by market condition. Average revenue: the total revenue divided by quantity sold. Marginal revenue: the change in total revenue from an additional unit sold. Shutdown: a short-run decision to produce nothing for a specific period of time. Sunk cost: a cost that has already been committed and cannot be recovered. If p > atc, profit is positi(cid:448)e e(cid:374)(cid:272)ourage e(cid:374)tr(cid:455) of fir(cid:373)s. Why long-run supply curve might slope upwards*: resources used in production may be available only in limited quantities, firms may have different costs. Monopoly resources: simplest way for monopoly to arise is for single firm to own key resource, economies are large and resources are owned by many people. In practice, monopolies rarely arise due to this.

Related Questions

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

Homework help and study guide help, all multiple choice

A monopolist:

A) can sell as much as it wants at the chosen price because it is the only seller.

B) can increase the price only if it is willing to decrease the quantity sold.

C) can increase the price and the quantity sold at the same time.

D) is not restricted by the law of demand.

A monopolistically competitive firm:

A) produces where marginal revenue equals marginal cost and charges the price consumers are willing to pay as given by the demand curve.

B) produces where marginal cost equals average total cost and charges the price consumers are willing to pay as given by the demand curve.

C) chooses price and quantity based on where the marginal cost curve meets the demand curve.

D) chooses price and quantity based on where the average total cost curve meets the demand curve.

21) Oligopoly is A) like a monopoly because there are barriers to entry. B) like perfect competition because oligopoly firms all sell homogeneous goods. C) like monopolistic competition because oligopoly firms all sell differentiated goods D) like perfect competition because there are many firms in the industry
ECON 1102 (Microeconomics) Test 4 (043015)

In ________ market structure, a firm's output depends ________.

A) an oligopoly; only on its own marginal revenue and marginal cost curves

B) a monopolistically competitive; in part on its competitors' price and quantity decisions

C) an oligopoly; in part on its competitors' price and quantity decisions

D) a monopolistically competitive; only on its marginal revenue curve

32. Which of the following is not a difference between monopolies and perfectly competitive markets?

A. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

B. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost.

C. Monopolies can earn profits in the long run while perfectly competitive firms break even.

D. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not.

40. Which of the following statements is not correct?

A. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.

B. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.

C. Only competitive firms produce the welfare-maximizing level of output.

D. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.

43. A monopolistically competitive firm is currently producing 20 units of output. At this level of output the firm is charging a price equal to $20, has marginal revenue equal to $12, has marginal cost equal to $12, and has average total cost equal to $18. From this information we can infer that

A. the profits of the firm are negative.

B. firms are likely to leave this market in the long run.

C. the firm is currently maximizing its profit.

D. All of the above are correct.

ECON10004 Lecture Notes - Lecture 8: Average Variable Cost, Marginal Revenue, Marginal Cost

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