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ECO100 - OCT 31

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James Pesando

3.2 Firm's MC curve = Firm's SS curve (if P>AVC) ● Marker SS = Sum of firms’ SS = Sum of firms’ MC ● ○ In order to identify the level of output the firm will choose in the perfectly competitive industry ○ Simply needs to know: what is the market price ○ MR = MC => q* is profit-maximizing level of output ○ If there are any other output, ■ price is clearly greater than marginal cost, additional revenue would exceed additional cost. continue to expand output ○ 1. Level of Profits, Entry and Exit ● 2nd Question: If firm is profit maximizing, identified q*, is firm earning economic profits? ○ In order to answer this question, diagram will become more complicated ○ Level of Profits: ■ TR > TC => your earning economic profits => TR/Q > TC/Q <=> P> ATC ■ TR = TC => breakeven <=> P=ATC ■ TR loss => TR/Q < TC/Q <=> P ATC) ○ Added a second cost schedule, the ATC schedule, to answer the question ○ First to do: identify the profit-maximizing output: 10 (where P=MC) ○ If you're producing 10 outputs, are you earning economic profits? ■ Profit: (P-ATC) * q = (25 - 20) * 10 = 50 ● earning average 5 dollars on each unit you sell ● we can demonstrate that the firm that is earning profit ● Case 3: Economic loss (P perfectly elastic demand curve ■ No one will buy from the firm if they raise their price any amount above 25 ○ Insight: ■ At P=25, firm profit maximizes by producing q=10 ● 1) Implies that when P> AVC, the firm chooses to produce output rather than shut down ● 2) Equivalently, economic loss > $50 for the firm to shut down ● Decisions of Perfectly Competitive firm, summary: ○ 1) Choose output (q) that maximizes profit : P = MC ■ The only decision it can make, the price is determined by the market ○ 2) Determine if should shut down in the short run ■ P Shut down (otherwise, continue to produce q) ● Consider fixed cost: i.e, lease ○ 3) Determine whether to exit industry in the long run ■ P exit industry (otherwise, continue to produce q) ● economic loss, exit in the long run ● No fixed costs in the long run ● The market for hot dogs stands is perfectly competitive. The typical hot dog stand is earning economic profits. ○ Question: ■ 1) What will happen to the market pri
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