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Questions and Answers
What is represented as fixed costs in the provided data?
What is represented as fixed costs in the provided data?
- $100 (correct)
- $36
- $25
- $50
If the total revenue declines, what can be inferred about the firm's profitability?
If the total revenue declines, what can be inferred about the firm's profitability?
- The firm becomes unprofitable at certain quantities. (correct)
- The firm will always remain profitable.
- The firm will certainly break even.
- The firm will experience increased variable costs.
How do total costs relate to total revenue when a firm's price declines?
How do total costs relate to total revenue when a firm's price declines?
- Total revenue may become less than total costs. (correct)
- Total revenue increases while total costs decrease.
- Total revenue has no impact on total costs.
- Total costs will always be higher than total revenue.
What does TC denote in the given context?
What does TC denote in the given context?
At what point can a firm be considered unprofitable based on the diagrams?
At what point can a firm be considered unprofitable based on the diagrams?
What differentiates the short-run from the long-run in microeconomics?
What differentiates the short-run from the long-run in microeconomics?
Which of the following statements accurately represents fixed and variable costs?
Which of the following statements accurately represents fixed and variable costs?
Why is labor often considered a variable input, while capital is seen as fixed?
Why is labor often considered a variable input, while capital is seen as fixed?
What mathematical relationship defines marginal cost?
What mathematical relationship defines marginal cost?
What do total costs consist of in production?
What do total costs consist of in production?
What implication does diminishing marginal productivity have for variable costs in the short-run?
What implication does diminishing marginal productivity have for variable costs in the short-run?
Which cost is calculated by dividing total costs by total output?
Which cost is calculated by dividing total costs by total output?
Under which condition might the assumption that labor is variable and capital is fixed not hold?
Under which condition might the assumption that labor is variable and capital is fixed not hold?
What does the notion of diminishing marginal productivity of labor suggest?
What does the notion of diminishing marginal productivity of labor suggest?
Which of the following is NOT a necessary condition for perfect competition?
Which of the following is NOT a necessary condition for perfect competition?
In perfect competition, firms are described as price takers. What does this imply?
In perfect competition, firms are described as price takers. What does this imply?
What happens to variable costs as a firm increases its output in the short-run?
What happens to variable costs as a firm increases its output in the short-run?
In the context of apartment rentals in NYC, what condition for perfect competition is violated?
In the context of apartment rentals in NYC, what condition for perfect competition is violated?
What is the profit-maximizing condition under perfect competition?
What is the profit-maximizing condition under perfect competition?
Which curve represents the total cost function when fixed costs are $100 and variable costs are given by $q^2?
Which curve represents the total cost function when fixed costs are $100 and variable costs are given by $q^2?
What is a common characteristic of firms in a perfectly competitive market?
What is a common characteristic of firms in a perfectly competitive market?
What is the profit maximizing condition for a firm under perfect competition?
What is the profit maximizing condition for a firm under perfect competition?
Under perfect competition, what does marginal revenue equal?
Under perfect competition, what does marginal revenue equal?
What should a firm do in the short-run if it experiences negative profits?
What should a firm do in the short-run if it experiences negative profits?
If a firm's total revenue is less than its variable cost, what is the firm's best short-run decision?
If a firm's total revenue is less than its variable cost, what is the firm's best short-run decision?
Which equation represents total profits?
Which equation represents total profits?
What will happen to a firm in the long-run if it consistently earns negative profits?
What will happen to a firm in the long-run if it consistently earns negative profits?
Under which condition can a firm that exhibits diminishing marginal productivity still earn positive profit?
Under which condition can a firm that exhibits diminishing marginal productivity still earn positive profit?
Which of the following best describes the relationship between fixed costs and variable costs?
Which of the following best describes the relationship between fixed costs and variable costs?
What is the primary goal of a firm in microeconomics?
What is the primary goal of a firm in microeconomics?
What does a production function express?
What does a production function express?
What does an isoquant represent in production theory?
What does an isoquant represent in production theory?
How is marginal productivity defined?
How is marginal productivity defined?
What is the implication of diminishing marginal productivity?
What is the implication of diminishing marginal productivity?
In the context of production functions, what do 'L' and 'K' represent?
In the context of production functions, what do 'L' and 'K' represent?
What happens to additional output as more units of an input are added under the principle of diminishing marginal productivity?
What happens to additional output as more units of an input are added under the principle of diminishing marginal productivity?
What will likely happen if a farmer keeps adding workers to a fixed-sized field?
What will likely happen if a farmer keeps adding workers to a fixed-sized field?
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Study Notes
Firm Goal
- Firms aim to maximize profits.
Production Function
- A production function is a mathematical relationship that expresses the amount of output possible with specific input levels.
- For example, a production function can show what output a firm can produce with a certain amount of labor (L) and capital (K), expressed as q = f(L, K).
Isoquants
- An isoquant represents all possible combinations of labor and capital that produce the same level of output.
Marginal Productivity
- Marginal Productivity measures the additional output generated by adding one more unit of an input, keeping other inputs constant.
- This evaluates how much extra product is produced by adding one unit of labor, capital, or another resource.
Diminishing Marginal Productivity
- As more units of an input are added (with other inputs fixed), the additional output produced from each new input unit eventually decreases.
- This is analogous to diminishing marginal utility for consumers.
Short-Run vs. Long-Run
- The short run is the time period where a firm can only change output by adjusting variable inputs like labor and raw materials.
- The long run is the period where a firm can change all inputs, including labor and capital.
Fixed and Variable Costs
- Fixed costs (FC): Costs of fixed inputs that remain constant regardless of output level.
- Variable costs (VC): Costs of variable inputs that vary with output level.
- Total cost (TC): FC + VC
- Marginal cost (MC): Additional cost of producing one more unit of output. Calculated as the change in TC divided by the change in output (MC = ΔTC/Δq).
- Average total cost (ATC): Total cost divided by total output (ATC = TC/q).
Diminishing Marginal Productivity and Variable Costs
- Diminishing marginal productivity implies that in the short run, a firm needs to use increasingly more labor to produce higher levels of output due to diminishing marginal returns.
- This leads to an exponential increase in variable costs and total costs.
Perfect Competition
- Perfect competition occurs when all firms in a market are price takers, meaning they have no power to influence the market price.
- This happens when:
- Products are identical.
- Consumers have full information about all prices.
- Consumers face low transaction costs.
- There is free entry and exit for firms in the market.
Profit Maximization
- Profit is total revenue minus total costs (Ï€ = TR - TC).
- Profit maximization occurs at the output level (q*) where marginal revenue (MR) equals marginal cost (MC).
- In perfect competition, MR = market price (P), so the profit maximization condition becomes P = MC.
Short-Run vs. Long-Run Firm Behavior
- In the short run, a firm will continue to produce if its total revenue (TR) is greater than its variable costs (VC).
- This allows the firm to recoup some of its fixed costs.
- If TR < VC, the firm will shut down in the short run.
- In the long run, a firm will always shut down if profits are negative.
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