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Questions and Answers
What is defined as the firm's profit?
What is defined as the firm's profit?
- Total revenue plus total cost
- Total revenue minus total cost (correct)
- Total revenue multiplied by total cost
- Total cost divided by total revenue
Which condition must be met for a firm to maximize its profits?
Which condition must be met for a firm to maximize its profits?
- Total Revenue equals Total Cost
- Fixed Costs are minimized
- Average Cost exceeds Average Revenue
- Marginal Revenue equals Marginal Cost (correct)
How can marginal cost be interpreted in the context of profit maximization?
How can marginal cost be interpreted in the context of profit maximization?
- As the total revenue from a single sale
- As the total cost of entire production
- As the cost of producing one more unit of output (correct)
- As the average cost per unit produced
When should a firm consider producing an additional unit of output?
When should a firm consider producing an additional unit of output?
What does the profit function π(Q) represent?
What does the profit function π(Q) represent?
What condition must be met for a firm to produce a positive quantity in the short run?
What condition must be met for a firm to produce a positive quantity in the short run?
If a firm's marginal cost is less than its average variable cost, what can be concluded about its total revenue?
If a firm's marginal cost is less than its average variable cost, what can be concluded about its total revenue?
Under what circumstances would a firm choose to shut down in the short run?
Under what circumstances would a firm choose to shut down in the short run?
In the long run, when will a firm want to exit the market?
In the long run, when will a firm want to exit the market?
What happens to a firm’s fixed costs in the short run?
What happens to a firm’s fixed costs in the short run?
What does it mean for a firm to be a 'price taker' in a perfectly competitive market?
What does it mean for a firm to be a 'price taker' in a perfectly competitive market?
How does a firm maximize profit in a perfectly competitive market?
How does a firm maximize profit in a perfectly competitive market?
What shape does the short-run supply curve typically have for a perfectly competitive firm?
What shape does the short-run supply curve typically have for a perfectly competitive firm?
Under what condition will a firm decide to produce a positive quantity in the short run?
Under what condition will a firm decide to produce a positive quantity in the short run?
Which of the following statements about average cost is correct?
Which of the following statements about average cost is correct?
What happens to a firm's revenue when it decreases its price to sell more quantity in the presence of monopoly power?
What happens to a firm's revenue when it decreases its price to sell more quantity in the presence of monopoly power?
How does the marginal revenue from selling the 6th unit change if the price is reduced when selling from 5 to 6 units?
How does the marginal revenue from selling the 6th unit change if the price is reduced when selling from 5 to 6 units?
What is indicated by the second term in the revenue change equation when a firm wants to increase quantity sold?
What is indicated by the second term in the revenue change equation when a firm wants to increase quantity sold?
In a perfectly competitive market, how does the marginal cost relate to marginal revenue for profit maximization?
In a perfectly competitive market, how does the marginal cost relate to marginal revenue for profit maximization?
What describes the relationship between the price and quantity demanded when a firm has monopoly power?
What describes the relationship between the price and quantity demanded when a firm has monopoly power?
Flashcards
Profit Maximization
Profit Maximization
The process by which a firm determines the quantity of output that will generate the highest profit.
Marginal Revenue
Marginal Revenue
The additional revenue generated by selling one extra unit of a good.
Profit Function
Profit Function
A mathematical representation of a firm's profit, calculated by subtracting total cost from total revenue.
Price Elasticity of Demand
Price Elasticity of Demand
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Marginal Revenue (MR)
Marginal Revenue (MR)
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Inelastic Demand
Inelastic Demand
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Elastic Demand
Elastic Demand
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Marginal Cost (MC)
Marginal Cost (MC)
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MR = MC
MR = MC
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Perfect Competition
Perfect Competition
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Price Taker
Price Taker
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Profit Maximizing Condition
Profit Maximizing Condition
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Short Run Supply Curve
Short Run Supply Curve
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Average Variable Cost (AVC)
Average Variable Cost (AVC)
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Short Run Profit Maximization
Short Run Profit Maximization
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Why MC < AVC Implies Losses
Why MC < AVC Implies Losses
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Long Run Exit Condition
Long Run Exit Condition
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Long Run vs. Short Run Decisions
Long Run vs. Short Run Decisions
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Study Notes
Profit Maximization
- Firms aim to maximize profit, defined as total revenue minus total cost.
- Revenue is the price per unit multiplied by the quantity sold.
- Profit is a function of quantity (Q).
- Profit maximization occurs when marginal revenue (MR) equals marginal cost (MC).
Marginal Revenue (MR) and Marginal Cost (MC)
- Marginal cost (MC) is the cost of producing one more unit.
- Marginal revenue (MR) is the revenue generated by producing one more unit.
- Profit maximization occurs when MR = MC.
Profit Maximization in Perfect Competition
- In perfect competition, firms are "price takers," meaning they cannot influence the market price.
- Marginal revenue (MR) is equal to the market price (p).
- Profit is maximized when market price (p) equals marginal cost (MC).
Short-Run Supply Curve
- The firm's short-run supply curve is the portion of the marginal cost curve that lies above the average variable cost (AVC) curve.
- If market price falls below average variable cost (AVC), the firm will shut down in the short-run and produce zero output.
Long-Run Decision
- In the long run, firms can adjust all inputs, including fixed costs (e.g., capital).
- Exit the market if Average Revenue (AR) or Price (P) is less than Average Cost (AC).
- Enter the market if price (P) is greater than Average Cost (AC).
Connecting Cost Minimization and Profit Maximization
- To maximize profit, a firm first minimizes its cost of producing a given output level.
- The cost-minimizing input combination (capital and labor) is determined by equating the ratio of marginal product to input price for each input.
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Description
This quiz focuses on the concept of profit maximization in economics, detailing the relationship between total revenue, total cost, marginal revenue, and marginal cost. It also covers the principles of profit maximization in perfect competition and the short-run supply curve. Test your understanding of these fundamental economic principles!
