L5

Question 1

How much should a firm produce?

Answer 1

At the production level at which they maximize their profit

Question 2

What are the three assumptions for profit maximization?

Answer 2

1. All firms produce identical products
2. A single firm is so small compared to the market that their decisions does not change the market price
3. New firms enter the market if potential for profit exists

Question 3

What is the marginal revenue?

Answer 3

Change in revenue resulting from one unit increase in output

Question 4

What is the principle of profit-maximization in the short-run?

Answer 4

A firm chooses output q*, so that profit, (the difference AB between revenue R and cost C) is maximized. At that output, marginal revenue (the slope of the revenue curve) is equal to marginal cost (the slope of the cost curve).

Question 5

What is the firms supply curve?

Answer 5

The portion on the marginal cost curve for which marginal cost is greater than average variable cost

Question 6

What is elasticity of market supply?

Answer 6

Percentage change in quantity of good and supplied due to a one percent change in price of a good

Question 7

When does a long-run competitive equilibrium occur (3 conditions)?

Answer 7

1. When firms maximize profit
2. When all firms earns zero economic profit, (no enter/exit)
3. When quantity demanded=quantity supplied