ECON101 Lecture Notes - Lecture 9: Average Variable Cost, Marginal Revenue, Marginal Cost

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browncrocodile545

10 Nov 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Corey Van De Waal

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purplechimpanzee495 and 51 others unlocked

ECON101 Full Course Notes

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Because marginal revenue is constant (horizontal) and marginal cost eventually increases as output increases, profit is maximized by producing the output at which marginal revenue (mr) = marginal cost (mc) If mr > mc, economic profit increases if output increases. If mr < mc, economic profit decreases if output increases. If mr = mc, economic profit decreases if output changes in either direction so economic profit is maximized. Economic loss a firm should decide whether to exit or stay in the market. If decide to stay must decide whether to produce something or to shut down temporarily. De(cid:272)isio(cid:374) (cid:449)ill (cid:271)e the o(cid:374)e that (cid:373)i(cid:374)i(cid:373)izes the fir(cid:373)"s loss. = total fixed cost (tfc) + total variable cost (tvc) total revenue (tr) = tfc + (avc - p) x q. If the firm shuts down, q is 0 and the firm still has to pay its tfc. So, the firm incurs an economic loss equal to tfc.

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

Given following Price and Total Cost functions:

P = 120 - 7Q

TC = 40 + 70Q - 10Q² + 0.6Q³

Where P = price, and Q is output.

Fill in the table below and answer the questions below the table.

Q	P	FC	TVC	TC	TR	Profit
0
1
2
3
4
5
6
7
8
9
10

If your company's goal is to maximize profit, answer the following questions below:

What price will you charge for your product?

What quantity will you produce?

And what would be your maximum profit or minimum loss at the price and output you chose?

2. If your company's goal is to maximize total revenue, answer the following questions below:

What price will you charge for your product?

What quantity will you produce?

And what would be your maximum total revenue at the price and output you chose? (3 points)

Question 3

Given a firm with the following cost data, fill in the table below.

Q = OUTPUT TFC = Total Fixed Cost AVC = Average Variable Cost ATC = Average Total Cost TVC = Total Variable Cost MC = Marginal Cost TC = Total Cost

Q	FC	TVC	TC	AVC	ATC	MC
0				---	---	---
1						10
2
3				10		10
4

yellowsea-lion638

A small firm faces an inverse demand function of P = 100 - Q. Its total cost function is given by TC = .5Q2. (You should see right away that marginal revenue is thus MR = 100 - 2Q, and it also happens that marginal cost is just MC = Q. Both MR and MC are the first derivatives of total revenue and total cost. And a quick comment on MC: unlike some marginal cost functions we've seen, this one is not constant, because marginal cost is getting $1 higher with each additional unit of output.)

The Chief Executive Officer will manage the firm, choosing output and price. Currently, the CEO is negotiating an incentive-based contract with the shareholders of the company.
(Hint: basing compensation on revenue will motivate revenue maximization rather than profit maximization!)

Hint: since the plan creates incentives for the CEO to maximize revenue rather than profit, you should not set MR = MC at this point. BIG hint: revenue is maximized when selling an additional unit won't increase your revenue, or in math terms, when MR = 0.)

Owners' proposal: CEO keeps 10% of TR.

Firm price:
Firm output:
Total revenue:
Firm profit:
CEO compensation:
Remaining profit for owners:

redfrog477

ECON101 Lecture Notes - Lecture 9: Average Variable Cost, Marginal Revenue, Marginal Cost

ECON101 Full Course Notes

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