142_3 - Entry and exit decisions All salvageable or...

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Villas-Boas – Lecture 3 EEP 142 Page 1 Entry and exit decisions. – All salvageable or avoidable costs are an opportunity cost of staying in a market. – No costs are fixed when entry or exit are concerned, – … though some costs may be sunk (unsalvageable).
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Villas-Boas – Lecture 3 EEP 142 Page 2 Entry example. Entering the bottled tea market. – Entry costs $10,000 (researching teas, lining up distributors). – You can rent a brewing machine for $3000 per month. – The monthly cost of labor and materials is a function of the number of cases brewed: C LM = 500 + 6T + .001T 2 MC =
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Villas-Boas – Lecture 3 EEP 142 Page 3 Entry example (continued). – Monthly demand for brewed tea is P = 12 - .001T.
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Villas-Boas – Lecture 3 EEP 142 Page 4 Entry example (continued). – What if demand declines to P = 10-.001T? Should the firm stay in the market? If not, when should it exit?
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Villas-Boas – Lecture 3 EEP 142 Page 5 Entry intuition and average costs. Before entry no costs are sunk Fixed costs of entry F, marginal costs MC(Q) Project operating profits at optimal Q – MR(Q*) = MC(Q*) Enter if TR(Q*) > TC(Q*) Divide TR(Q) and TC(Q) by Q – Enter if P(Q*) > AC(Q*)
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142_3 - Entry and exit decisions All salvageable or...

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