ECON Lecture Notes 1103

ECON Lecture Notes 1103 - Profit 10 000 x 1.5 – 1 million...

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ECON Lecture Notes 11/03/10 Shut-Down Condition - The firm should shut down if revenue is less than variable cost for all levels of production o The optimal production level is 0. Q = 0, profit = 0 – FC = -FC Q > 0, profit = TR – (FC + VC) If TR – VC < 0, Q > 0, then profit < -FC if keep the firm running o We can write down the shutdown condition as: TR < VC, Q > 0 P x Q < AVC x Q, Q > 0 P < AVC, Q > 0 Should the firm shut down if it suffers a loss at all Q > 0? FC = 1 million May or may not shut down Q = 10, 000 units AVC = $1/unit P = $1.50/unit
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Unformatted text preview: Profit: 10, 000 x 1.5 – 1 million – 10, 000 x 1 < 0 Shutdown: loss = a million Do not shut down: loss = 1 million – (15, 000 – 10, 000) > 0 Cost Curves-MC curve goes thru the lowest point of ATC and AVC curves Demand Curve of Individual Firms-perfectly competitive firms have no control over price o an individual firm’s output decision will not change the market price o market supply and demand set the market price P o taken the market price as given, each firm only decides how much to produce (Q)...
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