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Error! Filename not specified.35,000Error! Filename notspecified.Produce Error! Filename notspecified.Loss 40Error! Filename not specified.37,500Error! Filename notspecified.Produce Error! Filename notspecified.Loss 50Error! Filename not specified.40,000Error! Filename notspecified.Produce Error! Filename notspecified.Breakeven 60Error! Filename not specified.42,500Error! Filename notspecified.Produce Error! Filename notspecified.Profit Points:1 / 1Close ExplanationExplanation:If a competitive firm produces a positive output, it does so by choosing to produce the quantity at which market price (P) is equal to marginal cost (MC). For example, the point on the MC curve with a height of $50 has a horizontal value of 40,000 lamps. Therefore, if the price of a lamp is $50, the firm will produce 40,000 lamps. (Note: When price equals marginal cost at more than one quantity, the profit-maximizing quantity must be the quantity where marginal cost is increasing. If marginal cost is decreasing, this means that increasing production by one more unit would increase profit because marginal revenue would be larger than marginal cost. Therefore, production should continue until priceequals marginal cost in a region where marginal cost is increasing.)A firm's decision on whether to produce in the short run depends on whether it can earn enough revenue to cover its variable costs. This is because a firm's fixed costs must be incurred in the short
run, regardless of whether the firm produces output. Because these costs must be paid regardless of production, they are considered sunkand should not be taken into consideration in the short run. If the firm does not produce a positive output in the short run, economists say it shuts downGraphically, the firm's shutdown price occurs at the price at which MC=AVCMC=AVC. This is becauseat the shutdown price, the firm must be indifferent between the profit it earns when it produces and the profit it earns if it shuts down. You can see this in the following derivation using total revenue (TR), fixed cost (FC), variable cost (VC), average variable cost (AVC), price (P), and quantity (Q):Profit if ProducingProfit if Producing= = Profit if Shut DownProfit if Shut DownTR−(FC+VC)TR−FC+VC= = −FC−FCTRTR= = VCVCP×QP×Q= = AVC×QAVC×QPP= = AVCAVCTherefore, the firm's shutdown price occurs when P=AVCP=AVC. Since a competitive firm always chooses the quantity at which P=MCP=MC (if it produces), this must correspond to the intersection ofthe MC and AVC curves. In this case, the firm's minimum AVC is $20 per lamp. Therefore, if the market price is less than $20, the firm maximizes its profit by shutting down in the short run. If the market price is more than $20, the firm maximizes its profit by producing in the short run. If the market price is exactly $20, the firm is indifferent between producing and shutting down.Profitis the difference between total revenue and total cost. Breaking this down even further yields the following result:ProfitProfit= = TR−TCTR−TC= = P×Q−ATC×QP×Q−ATC×Q= = (P−ATC)×QP−ATC×QBecause a competitive firm sets P=MCP=MC, this means that the firm earns a positive profit if MC>ATC
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