When marginal revenue is less than marginal cost quantity goes down and profit

When marginal revenue is less than marginal cost

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When marginal revenue is less than marginal cost, quantity goes down and profit increases i. MR<MC : Quantity decreases, Profit increases Graphs of MR, MC, ATC and AVC When will a firm: (equations) shut down: Total Revenue < Variable Cost or Price < Average Variable Cost Stop for a while/ reorganize/ short term Exit: Total Revenue < Total Cost or Price < Average Total Cost Done forever/ long term Enter Price > Average Total Cost Opposite of exit a. Shut down (not leave permanently)- when a firm shuts down, it doesn’t have to pay variable costs
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i. When total revenue < variable costs ii. When profit < average variable costs b. Exit the industry- doesn’t have to pay variable or fixed costs i. When total revenue < total cost ii. When profit < average total cost c. Enter the industry i. When profit > average total cost
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Characteristics of market entry for Perfect Competition ( Price > Average Total Cost) 1. (Economic) profit attracts firms 2. Supply will increase 3. Supply curve shifts to the right 4. Price goes down a. Law of demand (price goes down, quantity goes up) b. More people are competing in the market 5. Profits will decline Characteristics of market exit for Perfect Competition (Total Revenue < Total Cost or Price < Average Total Cost) 1. Profits fall too far 2. Supply will decrease 3. Supply curve shifts to the left 4. Price goes up 5. Losses decline a. Profit go back up
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