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Unformatted text preview: Test questions: 27-SEP-2007 o In perfect competition, price = marginal revenue = average revenue. o The rule of microeconomics: Marginal costs = marginal revenue. It is the profit maximizing level of production. Once you get to that point, the production of an item is more than what you sell if for. Example: a hamburger costs $5 and you sell it for $5. Graph #4: o Deals with the total profit. o If a company starts having massive profits, then other companies will start producing the same product. This means: The demand curve will fall. There are still economic profits. Graph #5: o If the market price falls for the product (therefore the o Area 1 still involves revenue within the company. o Area 2 involves loses for the company; however the company can still stay in the market. The company cannot do so forever. It can only be done because it is still within the AVC (variable) range. Minimizing losses by covering all of variable costs only makes sense in the short run. In the long run you must go out of business. o Minimizing loses is profit maximizing behavior in the short run. Example: tractor that is too big for the farm however you must still use it because you already have it. o Will there ever be a point where the manager decides to stop production completely: Yes! The worker gets paid more than what he produces. His variable costs cannot be covered by the production level. This is D6. Called the shutdown point. o The short run supply curve is the Marginal Cost (MC) curve above minimum Average Variable Costs (AVC) o The marginal costs curve is the supply curve. o The supply curve tells you quantity of output (Red and black line). What various producers are willing to sell at different prices. This will change dramatically in imperfect competition. ...
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This note was uploaded on 04/11/2008 for the course AAEC 1005 taught by Professor Mjellerbrock during the Fall '07 term at Virginia Tech.
- Fall '07