Chapter 9

Chapter 9 - Maximizing rule: MR=MC, in order to maximize...

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Chapter 9 A. Theory of the Firm: The Basics 1) Assumption- when businesses go about making a decision they care about one thing only, the bottom line (they make decisions only to maximize their profits) i) Marginal ________ is the change in total _________ from ______ing one more unit of the good. 2) Profit= TR-TC a) Definitions i) Total revenue (TR)= P*Q ii) Marginal revenue (MR)= change in TR/change in Q; extra dollars that come in from the last good you sold iii) Total Cost (TC)- ex: wants to open up corndog stand (1) Explicit (Accounting)- $ out, paying workers or rent (2) Implicit- $ not in, the salary that you would’ve earned at a job you are doing now iv) Marginal cost (MC)=change in TC/change in Q b) Accounting= TR-explicit cost; always going to be > than economic profit c) EconProfit= TR-explicit cost-implicit cost d)
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Unformatted text preview: Maximizing rule: MR=MC, in order to maximize profit you must produce the amount that makes MR=MC e) Normal Profit: EconProfit=0, which means a positive accounting profit f) Examples 3) Costs a) Total (TC)= FC+VC b) Fixed (FC): costs that dont change with respect to quantity produced c) Variable (VC): costs that change with output, increase as you produce more; ex: labor d) Marginal (MC): change in total cost from producing one more unit of output; they are all variable e) Average: cost per unit, =Total/Q i) Total (ATC)= TC/Q ii) Fixed (AFC)= TFC/Q iii) Variable (AVC)= TVC/Q f) Average/marginal cost relationship; if MC > ATC then ATC goes up; if MC < ATC then ATC goes down g) Examples 4) Time- nothing to do with calendar, deals with cost time a) Short run: FC > 0 b) Long run: FC = 0...
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