Maximizing Profit

Question 1

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

Answer 1

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

Question 2

Total Revenue Equation:

Answer 2

TR = Price * Quantity

Question 3

Marginal Revenue:

Answer 3

Change in TR from each additional unit sold

Question 4

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

Answer 4

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.

Question 5

At what level do firms shut down?

Answer 5

When Price falls below Av. Variable Cost

Question 6

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

Answer 6

Freely exit the market

Question 7

General Rule for Profit Maximization

Answer 7

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

Question 8

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

Answer 8

Market Price