ECON 101 Chapter Notes - Chapter 14: Sunk Costs, Marginal Revenue

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22 Sep 2016

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The meaning of competition: competitive market a. i. Goods offered are similar: perfectly competitive markets b. i. Revenue of a competitive firm: revenue a. i. Tr (total revenue) = p(price) x q(quantity) a. ii. Mr (marginal revenue) = change in tr / change in q. 14. 2 profit maximization and the competitive firm"s supply curve. A simple example of profit maximization: profit a. i. Mr = change in tc / change in q: change in profit c. i. The marginal-cost curve and the firm"s supply decision: maximizing profits a. i. The firm"s short-run decision to shut down: shut down tr < vc, shut down tr/q < vc/q, shut down p < avc. Split milk and other sunk costs: sunk cost a. i. Cost that has already been committed and cannot be recovered a. ii. Rent and other costs to keep factories etc. running a. ii. 2. If revenue does not exceed variable costs (short run), company should shut down resulting in sunk fixed costs.

Related Questions

PROFIT MAXIMIZATION

Reminders:

Q: Quantity, TC: Total Costs, VC: Variable Costs, MC: Marginal Costs, MR: Marginal Revenue, TR: Total Revenue

1. Suppose the market for DVD movies is perfectly competitive. The industry price for the movies is $24, and a typical firm has the following total cost data:

Q	TC	VC	MC	MR	TR	Net Profit
0	10
1	33
2	53
3	70
4	90
5	114
6	143

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

2. Now suppose that some firms have been able to differentiate their DVDs, and the market has become monopolistically competitive. A typical firm now has the following demand schedule and total cost data:

Q	P	TC	VC	MC	MR	TR	Net Profit
0	40	8
1	35	20
2	30	28
3	25	40
4	20	56
5	15	76
6	10	100

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

Consider a monopolistically competitive market with N firms.

Each firm's business opportunities are described by the following

equations:

Demand: Q=100/N-P

Marginal Revenue: MR=100/N-2Q

Total cost: TC=50+Q(squared)

Marginal Cost: MC=2Q

a. How does N, the number of firms in the market, affect each firms

demand curve? Why.

b. How many units does each firm produce? (The answer to this and

the next two questions depend on N.)

c. What price does each firm charge?

d. How much profit does each firm make?

e. In the long run, how many firms will exist in this market?

coffeehamster593

A. A competitive firm

can consider only its location in setting the price.
must base its competitive price on product differentiation.
has the ability to set its own price.
must accept the price determined by the intersection of the market supply and demand curves.
has no supply curve.

B. If a firm is making an economic profit, then

the factors of production are being paid their opportunity costs.
there will be no change in the number of firms if the industry is perfectly competitive.
the factors of production are being paid less than their opportunity costs.
the factors of production are being paid more than their opportunity costs.
the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

marginal revenue is greater than price.
the elasticity of demand is constant.
marginal revenue decreases when the price decreases.
marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

shut down because economic profits are negative.
continue to produce as long as P > AVC.
continue to produce because accounting profits are positive.
set a higher price for its output.
set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

the marginal revenue curve.
perfectly inelastic.
always equal to marginal cost.
the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

monopolistic
oligopolistic
monopolistically competitive
perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

total revenue will fall if the price increases.
total revenue will be unchanged if the price increases.
total revenue will rise if the price increases.
the total supply will increase by an equal amount if demand increases.
the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

monopoly.
perfect competition.
theories of consumer behavior.
imperfect competition.
the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

perfect competition
monopolistic competition
oligopoly
monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

economic profits are zero.
TR > TC.
TR < TC.
P = AVC.
normal profits are zero.

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ECON 101 Chapter Notes - Chapter 14: Sunk Costs, Marginal Revenue

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