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Midterm 2 Review.docx

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Hannah Holmes

Both Kate and Kyle own furniture factories that produce rocking chairs. Kate has very low fixed costs and very high variable costs. Kyle has very high fixed costs and very low variable costs. Currently each are producing 100 rocking chairs at the same total costs Because Kate has high variable costs, she most likely has workers, which means that if they both produce more, the costs of her factory will exceed those of Kyle’s. On an Average Total Cost vs Q curve, the initial downward slope means you are producing at economies to scale (increasing returns to scale). If you are producing on the flat slope, then there are constant returns to scale. If you are producing on the upward slop, you are producing at a diseconomy. All this happens as you increase Quantity. Diminishing marginal product implies: Increasing marginal costs. If you know what marginal cost is at a minimum, then you can deduce that: Average variable cost must be decreasing (MC curve loops around at the bottom). In perfect competition, the marginal revenue curve: And the demand curve facing the firm are identical. If a firm is producing where Marginal Revenue > Marginal Cost: The revenue gained by producing one more unit of output exceeds the cost incurred by doing so. A firm in a PC industry is producing 50 units, its profit maximizing quantity. Industry price is $2 and total fixed costs and total variable costs are $2 and $40, respectively. The firm’s economic profit is: Total revenue = P*Q = 100 Total costs = $25 + $40 Profit = Total revenue – Total Costs =$35 The Taste Freeze Ice Cream Store is a perfectly competitive firm producing where MR = MC. The market
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