L5- Profit and loss

Question 1

profit formula

Answer 1

• revenue- costs
• opportunity cost is factored into costs

Question 2

normal profit

Answer 2

• if revenue= costs
• minimum reward necessary to keep factors of production in their present use, or cease to produce in long run

Question 3

supernormal profit

Answer 3

• revenue> costs

Question 4

profit maximisation for firm with no pricing power

Answer 4

• small player in big market= no influence over price of product
• to maximise profits, needs to choose output level at which total revenue is far above total cost curve as possible- q*
• draw this

Question 5

MC, MR profit maximisation diagram

Answer 5

• if firm has no influence over price of product, firm receives same revenue from sale of each unit of the good= marginal revenue is same (straight line)
• profit maximisation MC=MR
• less output than this= MR higher than MC- add to profits by increasing output
• more output than this= MR does not cover cost of MC

Question 6

profit maximisation for firm with pricing power

Answer 6

• profit maximisation where biggest distance between TR and TC
• TR= reverse U

Question 7

when should a firm shutdown

Answer 7

when AR=AVC or AVC>AR
- cannot cover variable costs, or can only cover variable costs, making no contribution to fixed costs
- if firm can cover AVC, but price is below AC, makes a loss but can still trade in short run
- MC=AC= break-even= normal profit
- price above AC, supernormal profit