Podcast
Questions and Answers
In perfect competition, how does a firm determine the profit-maximizing output level?
In perfect competition, how does a firm determine the profit-maximizing output level?
- By producing where marginal revenue equals marginal cost. (correct)
- By producing where total cost is minimized.
- By producing where total revenue is maximized.
- By producing where average total cost is minimized.
What does a perfectly competitive firm's total revenue curve typically look like?
What does a perfectly competitive firm's total revenue curve typically look like?
- A straight line sloping upwards. (correct)
- A curved line sloping upwards.
- A curved line sloping downwards.
- A horizontal line.
Under what conditions should a perfectly competitive firm shut down its operations in the short run?
Under what conditions should a perfectly competitive firm shut down its operations in the short run?
- When the price falls below average fixed cost (AFC).
- When the price falls below average variable cost (AVC). (correct)
- When the price falls below average total cost (ATC).
- When the price equals marginal cost (MC).
How would a decrease in production costs affect the supply curve for a perfectly competitive firm?
How would a decrease in production costs affect the supply curve for a perfectly competitive firm?
If a perfectly competitive firm's price is above its average variable cost but below its average total cost, what should the firm do in the short run?
If a perfectly competitive firm's price is above its average variable cost but below its average total cost, what should the firm do in the short run?
Which cost curve represents the firm's supply curve in perfect competition?
Which cost curve represents the firm's supply curve in perfect competition?
How is total cost (TC) calculated?
How is total cost (TC) calculated?
What is the formula for calculating profit?
What is the formula for calculating profit?
What does the curvature of the total cost curve indicate?
What does the curvature of the total cost curve indicate?
For a perfectly competitive firm, what is the relationship between marginal revenue (MR) and price?
For a perfectly competitive firm, what is the relationship between marginal revenue (MR) and price?
Flashcards
Profit Formula
Profit Formula
Total revenue minus total cost.
Total Revenue
Total Revenue
Price times quantity.
Total Cost
Total Cost
Fixed costs plus variable costs.
Marginal Revenue (MR)
Marginal Revenue (MR)
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Marginal Cost (MC)
Marginal Cost (MC)
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Profit-Maximizing Rule
Profit-Maximizing Rule
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Shutdown Point
Shutdown Point
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Supply Curve
Supply Curve
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Shifts in Supply Curve
Shifts in Supply Curve
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Study Notes
Profit Calculation
- Profit is calculated by subtracting total cost from total revenue: Profit = Total Revenue - Total Cost
- Total Revenue (TR) is the product of Price (P) and Quantity (Q): TR = P × Q
- Total Cost (TC) is the sum of Fixed Costs (FC) and Variable Costs (VC): TC = FC + VC
Total Revenue and Total Cost
- Total Revenue Curve: A straight, upward-sloping line reflecting the constant price in perfect competition.
- Total Cost Curve: Slopes upwards with curvature, showing increasing costs because of diminishing marginal returns.
Profit-Maximizing Output
- The highest profit occurs where the difference between Total Revenue and Total Cost is greatest.
- Firms maximize profit at output levels where Total Revenue (TR) is greater than Total Cost (TC).
Marginal Revenue and Marginal Cost
- Marginal Revenue (MR) is the extra revenue from selling one additional unit.
- Marginal Cost (MC) is the additional cost incurred from producing one more unit.
- In perfect competition, Marginal Revenue equals Price (MR = Price).
- Firms maximize profit by producing where Marginal Revenue equals Marginal Cost (MR = MC).
Shutdown Point
- The shutdown point happens when the price drops below the Average Variable Cost (AVC).
- If the price is more than AVC but less than Average Total Cost (ATC), the firm should operate temporarily to minimize losses.
Supply Curve
- A firm's supply curve is represented by the portion of the Marginal Cost (MC) curve above the Average Variable Cost (AVC) curve.
- A decrease in production costs shifts the supply curve to the right.
- An increase in production costs shifts the supply curve to the left.
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