Midterm 2 Review PDF

Midterm 2 Review Unit 4: Firm Costs Fixed Costs (FC): Costs that do not depend on the quantity of output produced Variable Costs (VC): Costs that depend on the quantity of output produced Total Costs (TC): Total costs of production Average Costs: Average Fixed Costs = FC/Q...

Midterm 2 Review Unit 4: Firm Costs Fixed Costs (FC): Costs that do not depend on the quantity of output produced Variable Costs (VC): Costs that depend on the quantity of output produced Total Costs (TC): Total costs of production Average Costs: Average Fixed Costs = FC/Q Average Variable Costs = VC/Q Average Total Costs = TC/Q Scale Economies of Scale: When average total cost is decreasing as quantity increases Diseconomies of Scale: When average total cost is increasing as quantity increases iClicker Question Where are the economies of scale? C A B D More on Firm Costs Marginal analysis – Examination of the additional cost/benefit of incremental changes to an activity (e.g. increasing output by one unit) Marginal Cost (MC): the change in total cost per unit from added units of production Efficient Scale Efficient Scale: the level of output at which cost per unit is minimized Occurs at intersection of ATC and MC curves Unit 5: Profit Maximization and Market Power Market Power Two approaches to profit maximization for firms with Market Power Marginal Analysis Inverse Elasticity Pricing Rule Price Discrimination Welfare Economics… how is the pie split between consumers and producers? Profit Maximization via Marginal Analysis Guiding Principles: If MCMR then decreasing output by one unit will increase profits Profit maximization happens at the largest quantity where MC≤MR Example Reven Marginal Marginal P Q ue VC FC TC Revenue Cost 10 0 0 3 9 1 2 8 2 4 7 3 6 6 4 8 5 5 10 4 6 12 3 7 14 Fill in the blanks and answer the questions: When is profit maximized? Bonus: Where is efficient scale achieved? Example: Solution Marginal Reven Revenue Marginal P Q ue VC FC TC Cost Profit 10 0 0 0 3 3 - - -3 9 1 9 2 3 5 9 2 4 8 2 16 4 3 7 7 2 9 7 3 21 6 3 9 5 2 12 6 4 24 8 3 11 3 2 13 5 5 25 10 3 13 1 2 12 4 6 24 12 3 15 -1 2 9 3 7 21 14 3 17 -3 2 4 Inverse Elasticity Rule Definition: Inverse elasticity pricing rule: In order to maximize profits, the firm should set price at the point on the demand curve where the markup is equal to the inverse elasticity of demand (Markup) If Markup > Inverse Elasticity… price is too high If Markup