Lecture4_Competition_Econ121_Fall2010

Lecture4_Competition_Econ121_Fall2010 - Lecture 4...

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Click to edit Master subtitle style 2/2/11 Lecture 4 Competition and Costs Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban
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2/2/11 The Shutdown Condition Rearranging gives us the shutdown condition. Shut down if p < cv(q)/q = AVC(q). That is, if the average variable costs are greater than p, the firm would be better off producing zero units of output. This makes sense since it says that
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2/2/11 The Shutdown Condition If the fixed costs are not sunk - that is they can be avoided if the firm shuts down - then the shudown condition becomes, AC(q) > p . If only part of the fixed costs are sunk (e.g., you can break the lease but you have to pay a penalty), then the shutdown condition will be
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Shut-Down Rule: The firm should shut down if the price of the product is less than the average variable cost of production at the profit-maximizing output (if fixed costs are sunk). The Shutdown Condition –
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2/2/11
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2/2/11
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2/2/11
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2/2/11
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Short Run vs Long Run In the long run , all costs are variable; hence, the long run supply function of a firm will be to produce q such that MC(q) = p for all p ≥ AC , which in the long run equals AVC.
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This note was uploaded on 02/01/2011 for the course ECON 121 taught by Professor Woroch during the Fall '07 term at University of California, Berkeley.

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Lecture4_Competition_Econ121_Fall2010 - Lecture 4...

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