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Unformatted text preview: nomics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. (⏟) (⏟) (⏟) (⏟) This says that the firm should produce nothing if the marginal revenue at the minimum quantity (here zero) is less than
or equal to the marginal cost at the minimum quantity (here zero). See the graph below for an example for a firm with a
linear demand function, constant returns and zero minimum output: Case C: when
() () Demand In this example, even though there’s a demand for the company’s product/service, the marginal cost of the lowest
output is greater than the marginal revenue: the firm would lose money on every unit it produces. In this case it makes
no sense to produce the output. (⏟) Let’s interpret the FOC for case C: Given that ( ⏟ ) and recalling that so that the FOC can be written as:
⏟ ⏟ ⏟ ⏟ ⏟ ⏟ If the firm is producing the minimum output (in this case zero) then at the optimal solution “marginal revenue =
marginal cost plus , where the latter term is the reduction in profits due to “excessive production” and where 44
ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. is a negative number whenever the minimum required output is greater than the unconstrained solution (see
Check when/if ⏟? Check when/if This says the company should produce an output between the minimum...
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This document was uploaded on 01/19/2014.
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