Microeconomics 32 Friday, November 17, 2006

Microeconomics 32 Friday, November 17, 2006 - Friday,...

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Friday, November 17, 2006 Microeconomics $ PROFIT = TR- TC MC Recall ATC = TC/q = TC =ATC x q Positive Economic ATC PROFIT = TR - TC Profit =(p*)(q*)-(ATC*)(ATC*)(q*) =(p*-ATC*)(q*) = > O P* P = MR TR Gray is TR q* q TC $ MC Normal Zero Profit = Economic ATC PROFIT = TR - TC 0 Profit Profit =(p*)(q*)-(ATC*)(ATC*)(q*) =(p*-ATC*)(q*) = > O ATC* P* P = MR Shaded area Is TR and TC q* q $ MC ATC Negative Economic PROFIT = TR - TC Profit =(p*-ATC*)(q*) ATC* = < O P* P = MR Blue = TR Red + Blue = TC Red = Negative Profit q* q
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Friday, November 17, 2006 If P* > ATC* (ATC at q*), the firm is earning positive economic profit IFP* < ATC* (ATC at q*), the firm is earning negative economic profit WHEN SHOULD THE FIRM SHUT DOWN? Key concept is you need to compare fixed costs to the losses incurred from operating $ loss MC ATC Recall AFC = ATC - AVC incurred AFC = FC/q = FC =AFC x q from AVC operating
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Microeconomics 32 Friday, November 17, 2006 - Friday,...

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