4 - Costs, Profits & Supply

Question 2

Short-run cost Curves | Average Variable Costs

How do they change if Average Productivtiy Changes?
What is their relation to marginal costs?

1.
2.
3.
4.
5.
6.
7.
8.

Answer 2

• decreasing with quantity as long as average productvity increases
• increasing with quantity if average productivity decrease
• U-shaped curve
• equal to marginal costs for the first (marginal) unit produced
• average of marginal costs of all units produced
• decreasing with quantity as long as marginal costs decrease
• decreasing with quantity even if marginal costs increase as long as marginal costs are lower
• increasing with quantity when marginal costs larger

Question 3

Short-run Cost Curves | Average total costs

What are they made of?
How do they change if Average Variable costs change?

1.
2.

Answer 3

• sum of average fixed costs and average variable costs
• decreasing even if average variable costs increase if compensated by the effect of fixed cost degression

Question 4

Short run Cost curves | Marginal Costs
How do they change if the marginal prodcutivity changes?

1.
2.

Answer 4

• decreasing with quantity if marginal productivity increases (learning effects)
• increasing with quantity if marginal productivity decreases (competition for the fixed factor)

Question 5

What can be said about the intersection bewteen marginal cost curve and average variable cost curve?

Answer 5

Marginal cost curve intersects average variable cost curve in its minimum

Question 6

What can be said about (Perfectly) competitive markets when it comes to….

Price Taking?

1.
2.
3.

Answer 6

• firm has no influence on market price (many small suppliers)
• firm takes prices as given
• firm is adjusting output

Question 7

What can be said about (Perfectly) competitive markets when it comes to….

Product homogenity?

1.
2.
3.

Answer 7

• products of all suppliers are perfect substitutes from the viewpoint of the customers
• no individual preferences for products or suppliers
• no differences in prices

Question 8

What can be said about (Perfectly) competitive markets when it comes to….

Free market entry and exit?

1.
2.

Answer 8

• no costs of entry and exit
• no legal restrictions or hampering factors

Question 9

In what situation do we have the most optimal profits?

Answer 9

-profits are optimized if price equals marginal costs
- FOC -first order condition: P = MC

Question 10

In what case can we maximize profits?

Answer 10

• profits are maximized if marginal costs increase

Question 11

What does the business condition state?

1.
2.

Answer 11

• contribution margin (CM) has to be non-negative
• price has to cover average marginal costs