The Supply Decision Flashcards
1
Q
Where do Firms Maximise Profits?
A
Where MC = MR
2
Q
Why is MR twice as Steep as AR?
A
Because if you want to raise the price, you must raise the price for both the New Additional Unit AND all Previous Units as well
3
Q
Why do Firms NOT Supply at MR > MC?
A
Additional Output would still mean MR > MC
==> Therefore, Additional Output would still Increase Profit
4
Q
Why do Firms NOT Supply at MR < MC?
A
The Cost of the Additional unit > Revenue from Additional unit
==> Loss on the Unit
5
Q
What is the FOC for Profit Max.
A
dProfit / dQ = (dTR/dQ) - (dTC/dQ) = MR - MC = 0
==> MR = MC
6
Q
What is the Condition of the SOC for Profit MAX.
A
d2Profit / dQ2 < 0
Less than 0 = Maximum
Greater than 0 = Minimum
dMR/dQ - dMC/dQ < 0–> i.e. MR falling slower than MC
7
Q
Draw the SOC for Profit Max.
A
U-Shaped MC Downward Sloping MR MR can cross MC twice--> MC = MR twice ==> BUT only ONE is Profit Max. To Satisfy SOC: -MC must be Sloping UP & MR must be Sloping DOWN OR -MC Sloping UP at a Slower Rate than MR
