Econ 3-14-2011 - 14:19 ComparingPtoMC IsOptimalProfitable...

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Econ 3-14-2011 Chapter 13 14:19 Marginal Analysis gives us the optimal level of production Comparing P to MC Is Optimal Profitable? Not necessarily: marginal analysis gives is the optimal quantity if the firm  produces Wrong Answer: close if P<ATC Firm earns profit only if P > or = to ATC  Fixed costs must be paid in the short run, or fixed costs are skunk in the short  run Right Answer: close if P<AVC Optimal short run decision: produce as long as P > or = to AVC Firms optimal decision is produce as long as P >= MC We can then assess profitability and production conditions Remember we are talking about economic profits…or normal profits The Industry Supply Curve The horizontal sum of individual supply curves Short-run industry supply curve o Short-run takes the number of firms as given o Which makes sense because the fixed factors cannot be acquired or sold 
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Econ 3-14-2011 - 14:19 ComparingPtoMC IsOptimalProfitable...

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