microbook_3e-page115

microbook_3e-page115 - x When total cost exceeds total...

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Profit-Maximization To maximize profit, a firm sets the level of output to the point where marginal revenue equals marginal cost. But what if the point where MR = MC, causes the firm to lose money? In that case, it has to minimize its losses. x Total profit (or loss) = TR – TC = TR – VC – FC x Operating profit (or loss) = TR – VC Note: operating profit is greater than total profit when FC > 0 If revenues exceed variable costs, operating profit is positive and can be used to offset fixed costs (thus reducing losses) , and it will pay the firm to keep operating – in the short-run . Profitability x When total revenue exceeds total cost (p > AC), firm makes positive profits.
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Unformatted text preview: x When total cost exceeds total revenue, but revenues exceed variable cost (AC > p > AVC), firm suffers losses, but its operating profit is still positive. It continues operating in the short-run, but exits industry in the long-run. x If revenues are less than variable costs (p < AVC), firm suffers operating losses. Total losses exceed fixed costs. To minimize losses firm shuts down. Q MC AC AVC MR 2 = p 2 MR 1 = p 1 Total Profit > 0 Total Profit < 0 Oper. Profit > 0 Shut Down! when p = AC Total Profit = 0 when p = AVC Oper. Profit = 0 p, MR, MC, AC, AVC Page 115...
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