Economics Notes 9.28.07 - 3 $50 $150 For competitive firms...

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Q$ Most of the burden will fall on the party least responsive to the price change |E D | = 0.8 Es = 1 Tax = $ Subsidy encourages more consumption and production Characteristics: 1. Many buyers and sellers 2. Homogeneous product Buyers and sellers are price takers 3. Easy to enter and exit the market Short Run Decisions Long Run Decisions At least 1 fixed input every input is variable No firms can enter or exit allow for entry/exit Every firm’s goal is to maximize profit Pi sign = profit Max profit = TR-TC Marginal revenue = change in total revenue / output change
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Marginal cost = change in total cost/ change in output = change in total variable cost/change in output = wage rate/marginal product of labor MKT Firm – price taker Marginal Cost $50 D (=Marginal revenue) Firm’s Revenue / Marginal Revenue schedule Q P TR MR = delta TR/delta Q 0 $50 $0 -- 1 $50 $50 (50-0)/1-0= $50 2 $50 $100
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Unformatted text preview: 3 $50 $150 For competitive firms, Marginal revenue = price for each quantity Marginal Revenue – Marginal Cost = Marginal profit Profit maximization occurs where MR = MC all market structures | |-- P = MC if and only if you are a competitive firm Total fixed cost = $1000 Profit = total revenue – total cost = total revenue – (total fixed cost + total variable cost) = total revenue – total variable cost Produce where MR = P = MC If and only if TR > TVC P > AVC TFC = $1000, P=$50 P=MR = MC where output (Q) = 200; AVC (Q=200) - $55 Should you produce or not? No, because price does not cover AVC Shut down Q = 0, Loss = $1000 Pi = TR-TC = $50(200)-TFC-TVC-$1000-$55(200) = -$2000 Farmer Jack’s Costs AVC=TVC/Q Q AVC MC--1000 $2 $2 1800 $2.22 $2.50 2400 $2.50 $3.33 MC AVC...
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