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Tutorial+8+Solutions - Eco1010f Tut assignment 8 1 a A firm...

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Eco1010f Tut assignment 8 1. a). A firm maximizes its profits when its marginal costs and its marginal revenue are equal. Explain why this is true (one short paragraph, a diagram and a two lines of calculus should be enough). See slides on Vula Basic idea, either use TR and TC and show that π max is where they are parallel, or use MC and MR explaining the intuition behind decisions at the margin. b). While MC = MR is a necessary condition it is not a sufficient condition for profit maximization. Explain. Two reasons: it has to be the upward sloping bit of MC – if it’s the downward sloping section you minimize profit i.e. maximise the loss. If you are making a loss it may be better to shut down. The second condition needed if MC = MR to still be profit maximizing or loss minimizing is that P ≥ AVC 2. The short run supply curve of a firm in a perfectly competitive industry is determined by the law of diminishing returns. Explain this statement after showing how such a supply curve is derived. DMR gives you the TP,

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Tutorial+8+Solutions - Eco1010f Tut assignment 8 1 a A firm...

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