ECO 201 Lecture Notes - Lecture 26: Average Variable Cost, Demand Curve, Marginal Cost

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5 Apr 2016

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Profits are maximized when marginal cost and marginal revenue are equal. Marginal cost: the additional cost to produce an additional unit. Marginal revenue: the additional revenue from selling and additional unit. Point a: intersection of marginal cost and marginal revenue. Point b: average total cost for profit maximizing where point b intersects q* Point c: average variable cost for profit maximizing where point c intersects q* If point a is above point b there are positive economic profits. If point a is below point b the firm is making negative economic profit. It will continue to operate if point a is above point c. If point c is above point a the firm will shut down. If point a equals point b then there is zero economic profit. If the firm cannot pay any fixed costs and cannot pay all of its variable costs, then if the firm shuts down they would only those their revenue.

Related Questions

Profit maximization occurs when:

A. a firm expands output until marginal revenue is exceeded by marginal cost.

B. a firm expands output until marginal revenue is equal to marginal cost.

C. the price in the market is equal to the firm’s marginal revenue.

D. total costs equal total revenue.

E. a firm sets the price at a point above the average total cost.

greyelephant419

46) If a profit-maximizing firm in a perfectly competitive market is making an economic profit, then it must be producing a level of output where A) marginal cost is greater than average total cost. B) marginal cost is greater than marginal revenue. C) price is greater than marginal revenue. D) price is greater than marginal cost. E) average total cost is greater than marginal cost.

Q1. Average total cost is equal to
a. AFC + AVC
b. AFC/total output
c. AFC/AVC
d. AVC/AFC

Q2. As output increases, the ATC
a. increases
b. decreases
c. remains constant
d. falls and then rises

Q3. Total profit is equal to
a. total revenue minus total cost
b. total revenue minus explicit cost
c. total revenue minus variable cost
d. total revenue minus marginal cost

Q4. Marginal cost crosses the
a. AVC curve at the highest point of the AVC curve
b. ATC curve at the lowest point of the ATC curve
c. AFC curve at the lowest point of the AFC curve
d. ATC curve at the highest point of the ATC curve

Q5. Wages paid are an example of an explicit cost of doing business.
a. true
b. false

Q6. Any revenue over and above total cost is labeled economic profit.
a. true
b. false

Q7. If the selling price of a product is $10, the average total cost is $8, and total sales are 5,000 units, the total profit will be
a. $5,000
b. $8,000
c. $10,000
d. $20,000

Q8. Whenever marginal revenue exceeds marginal cost,
a. profit declines if output increases
b. profit increases if output increases
c. losses increase if output increases
d. marginal revenue must be rising

Q9. Under perfectly competitive conditions, marginal revenue is
a. greater than average revenue
b. equal to average revenue
c. less than average revenue
d. equal to the average variable

Q10. A firm's break-even point occurs where
a. marginal revenue equals marginal cost
b. marginal revenue equals average variable cost
c. total revenue equals total cost
d. total revenue equals total variable cost

Q11. The addition to total output resulting from using one more unit of a productive resource is the
a. average product
b. marginal input
c. total product
d. marginal product

Q12. Unlike a firm in pure competition, a monopolist may be able to
a. block the entry of new firms into the industry
b. continue to earn economic profits in the long run
c. earn economic profits in the short run
d. both (a) and (b)

Q13. Producer surplus is the difference between the price the firm is willing to sell its goods and the price it actually receives.
a. true
b. false

Q14. In the long run, under conditions of perfect competition, market forces come into play to
a. enhance profits
b. increase demand
c. eliminate profits
d. separate MR and AR

Q15. Consumer surplus is the area above the demand curve and below the equilibrium price.
a. true
b. false

Q16. Under perfect competition, market price is determined by market demand and supply.
a. true
b. false

Q17. The more that firms advertise, the closer they get to perfect competition.
a. true
b. false

Q18. Perfect competition assumes that a producer is interested in maximizing profit.
a. true
b. false

Q19. In the long run, under conditions of perfect competition, the buyer will eventually be able to buy the product at a
a. price equal to the lowest point on the ATC curve past the optimal scale of operation
b. price below cost
c. price equal to the lowest point on the ATC curve at the optimal scale of operation
d. discount

Q20. The lowest possible ATC curve is attained at the optimal scale of output.
a. true
b. false

ECO 201 Lecture Notes - Lecture 26: Average Variable Cost, Demand Curve, Marginal Cost

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