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ECON 10010 Lecture Notes - Lecture 7: Root Mean Square, Average Variable Cost

33 views5 pages
5 Feb 2016
School
ND
Department
Economics
Course
ECON 10010
Professor
Cody Forsberg

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Document Summary

Shut down if tr < vc: the rm shuts down if the revenue that it would earn from producing is less than its variable costs of production. Shutdown if p = ar = mr < avc: when choosing to produce, the rm compares the price it receives for the typical unit to the average variable cost of producing the typical unit. If the price doesn"t cover the average variable cost, the rm should stop production. The rm still loses money because it has to pay. Xed costs, but not as much as it would lose by staying open. The firm"s long-run decision to exit or enter a market. The rm exits if total revenue is less than total cost. The rm exits if the price of its good is less than the average total cost of production. The rule for entry is the opposite of the rule for exit. Pro t in our graph for the competitive firm.

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Related Questions

Deriving the short-run supply curve.

Consider the competitive market for halogen lamps. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. For each price in the following table, use the graph to determine the number of lamps this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero lamps and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price.

Price

(dollars per lamp)


Quantity of lamps

 

Produce or shutdown

 

Profit or loss

 

15

 

 

 

20

 

 

 

25

 

 

 

55

 

 

 

70

 

 

 

85

 

 

 

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.


Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

A farmer is producing where MC = MR. Say that half of the cost of producing wheat is the rental cost of land (a fixed cost) and half is the cost of labor and machines (a variable cost). If the average total cost of producing wheat is $26 and the price of wheat is $10, what would you advise the farmer to do? (“Grow something else” is not allowed.)

a. In the short run, the farmer should shut down because he is making a net loss. By producing he will lose $16 per unit, but if he did not produce he would simply have zero profit.

b. The farmer should reduce output so that average total costs would decline.

c. The farmer should increase the price at which he sells wheat to $26.

d. In the short run, the farmer should still grow wheat because by producing he will lose $16 per unit, but if he did not produce he would lose $13 per unit. In the long run, the farmer will go out of business.