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Unformatted text preview: nd a firm’s supply function, we
can apply the quantity and shutdown rules. If the firm produces, then it produces a quantity where marginal
cost equals marginal revenue: 9Q2 = P Q2 = P/9 Q = (P/9)0 .5 . e z to.mhe c loud.mc gr a w- hill.c om/hm.tpx? todo= pr intvie w 10/14 1/15/14 Assignme nt Pr int Vie w At each price above the lowest level of average cost, ACmin , the firm’s profitmaximizing quantity is positive
and equates price with marginal cost. At each price below the lowest level of average cost, ACmin , the firm
supplies nothing. When the price exactly equals ACmin , the firm is indifferent between producing nothing and
producing at its efficient scale, the quantity at which its average cost is lowest, if that is different from zero.
When the firm has no avoidable fixed costs, the average cost of production (AC) is: AC = VC/Q AC = 3Q3 /Q AC = 3Q2 ,
which is minimized at $0 when Q = 0. Therefore, the firm’s supply function is: Q = (P/9)0 .5 for P ≥ 0. When we add avoidable fixed costs of $384, the implications of the quantity rule do not change (the avoidable
fixed cost changes neither marginal revenue nor marginal cost). However, the desirability of staying in
business does change, so we need to determine the new level of minimum average cost (ACmin ).
When the firm has avoidable fixed costs (FC), the average cost of production (AC) is: AC = (VC/Q) + (FC/Q) AC = (3Q3 /Q) + (384/Q) AC = 3Q2 + (384/Q).
The new efficient scale of production is the output level where marginal cost equals average cost. It is the Q at
which: MC = AC 9Q2 = 3Q2 + (384/Q) 6Q2 = (384/Q) Q3 = (384...
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This note was uploaded on 01/22/2014 for the course ECO 3352 taught by Professor Ax during the Fall '13 term at Troy.
- Fall '13