Lecture Slides 24 - Overview Lecture 22 Last class Theory...

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Overview ( Lecture # 22) Last class: Theory of Firms Today: Market structure. 11/30/16 1 Econ 130_ Fall 2016 _ C Dhakal
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11/30/16 Econ 130_ Fall 2016 _ C Dhakal 2 If firm operates at point where MR>MC ( Q=40 or 50), firms can increase Profit since MR is exceeding the MR. If firms operates at point where MR< MC (Q= 80 or 90) then it can increase profit by deceasing output. rm’s profit-maximizing choices occurs at a point where MC=MR
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11/30/16 Econ 130_ Fall 2016 _ C Dhakal 3 The profit-maximizing choice for a perfectly competitive firm will occur where where MR = MC, that is the point of highest possible level of economic profit. A profit-seeking firm should keep expanding production as long as MR > MC. Expanding production into the zone where MR < MC will only reduce economic profits. Because the marginal revenue received by a perfectly competitive firm is equal to the price (P). So P = MR, the profit-maximizing rule for a perfectly competitive firm can also be written as a recommendation to produce at the quantity where P = MC.
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