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Unformatted text preview: 1 Chapter 11 Supply Curve of the Generic Firm General Maximizatinon Rule MB = MC Right now we will assume that the Marginal Benefit is given. (Much like we did for individ- uals when we assumed that the price of the product was given.) Assume: The following costs for a firm Table 1: Average Costs Q MC AVC ATC – – – 1 28 28 70 2 16.8 22.4 43.4 3 11.2 18.67 32.67 4 7 15.75 26.25 5 7 14 22.4 6 14 14 21 7 28 16 22 If the marginal benefit to the firm from producing each unit is always $28 how many units should it produce? There are 2 places where MC =$28. The marginal cost is $28 if the firm produces 1 unit and when it produces 7 units. If the firm produces 7 units it will receive the marginal benefit of $28 for producing the 1 st through 7 th units. While the cost of producing each of these units is less than $28. The MB ≥ MC for each of these units so they should be produced. So the firm should produce 7 units and not 1 unit. In general this will always be the case. When MB = MC occurs at 2 different levels of output the firm’s optimal decision is to produce at the higher level of output. The marginal cost is not the only thing to be taken into account when deciding a firm’s optimal level of output. Variable costs are a reflection of the marginal costs. The firm only incurs a variable cost if it decides to produce and the variable cost is the sum of the marginal costs. Total costs are ignored because they include fixed costs. The fixed cost is incurred regardless of the firms decision to produce so it is a sunk cost. 2 If the marginal benefit to the firm from producing each unit is always $7 how many units should it produce? Again the MC = 7 at 2 different levels of output so the natural tendency is to advise the firm to produce 5 units. However, if the firm were to produce 5 units it would lose money. The optimal decision for the firm in this case is to shutdown and produce 0 units of output. This is because firm would lose money. On average it costs the firm $14 to pay labor. So it will be losing money from both the fixed and variable input. Whereas, if it produced 0 units it only loses money from its fixed input. This firm will produce as long as its marginal benefit is $14 or more and at this point makes 6 units. At this point the firm is covering all of its variable cost and not of its fixed cost. This is called the shutdown point. If the marginal benefit from each unit produced is $21 then the firms optimal output level is 6 but at this point the firms benefit will be equal to the total cost. This is the break-even point. Shutdown Point –The minimum point on the average variable cost curve. Breakeven Point – The minimum point on the average total cost curve....
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This note was uploaded on 10/14/2010 for the course DDF 1124-445 taught by Professor Gorthermclays during the Spring '10 term at Florida College.
- Spring '10