Maximizing Profit Flashcards

1
Q

In a perfectly competitive market, a firm maximizes profits from production by:

A

choosing the level of output at which marginal cost equals marginal revenue, which, in perfect competition, is the market price

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2
Q

Total Revenue Equation:

A

TR = Price * Quantity

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3
Q

Marginal Revenue:

A

Change in TR from each additional unit sold

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4
Q

How do you find profit maximizing level of output using Marginal Cost?

A

If the price exceeds the marginal cost of increasing output by one unit, the firm will produce another unit. It keeps increasing its output until it reaches a point where increasing output by one more unit has a marginal cost that is greater than the price.

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5
Q

At what level do firms shut down?

A

When Price falls below Av. Variable Cost

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6
Q

In perfectly competitive market firms can not do this in the short run:

A

Freely exit the market

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7
Q

General Rule for Profit Maximization

A

Increase output as long as marginal revenue is greater than marginal cost

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8
Q

Under perfect competition each firm’s marginal revenue curve is determined by…

A

Market Price

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