EC120 Lecture Notes - Lecture 9: Average Variable Cost, Marginal Cost, Profit Maximization

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Short run some factors are fixed: divide costs in variable and fixed costs, companies decide to produce or not, and how much. Long run all productive factors can be changed: factories can be built, or resized, companies may enter or exit markets. Very long run technology can change: technology changes both intentionally and unintentionally. Assume increasing and then diminishing marginal product. Average total (atc), average fixed cost (afc), average variable cost (avc), marginal cost (mc) Afc is always downward sloping line, atc is the total of afc and avc (above them) Marginal cost starts the same as avc (pink part) never efficient. Long run firms choose how much capital and labour to use in production. Profit maximization implies cost minimization: cost minimization choosing the least costly way to produce a given quantity of output, profit maximization also requires selecting the correct amount of output to produce. Long-run cost minimization equate marginal productivity per dollar spent across categories.

Related Questions

Q8. To arrive at a logical determination of a firm's optimum output, economists assume that the firm seeks to
a. maximize output
b. minimize cost
c. maximize profit or minimize loss
d. maximize price

Q9. So long as marginal cost is rising, average variable cost must rise.
a. true
b. false

Q10. As output increases, marginal cost increases, reaches a maximum, and then falls.
a. true
b. false

Q11. Which of the following is the best example of variable cost?
a. depreciation on a building
b. property taxes
c. wages
d. rent paid for one's building

Q12. If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is
a. $72,000
b. $48,000
c. $24,000
d. negative $96,000

Q13. Under perfect competition, if a firm is suffering a loss,
a. MR exceeds ATC
b. AR equals AVC
c. AR equals ATC
d. AR is less than ATC

Q14. Elaine's firm is in a perfectly competitive industry. Why doesn't Elaine try to sell more of her product by lowering its price below the market price?
a. her demand curve is not elastic
b. doing so would be considered unethical price chiseling
c. her competitors would not allow it
d. she can sell all she wants at the market price

Q15. In the long run, perfect competition results in firms producing
a. at the minimum point of their long-run average cost curves, which indicates allocative efficiency
b. where price equals marginal cost, which indicates economic efficiency
c. where price equals marginal cost, which indicates the optimal scale of operation
d. at the minimum point of their long-run average cost curves, which indicates economic efficiency

Q16. On a graph of average cost curves, the space between ATC and AVC represents AFC.
a. true
b. false

Q18. If MC equals MR at a point greater than ATC, the perfectly competitive firm will
a. sustain a loss
b. shut down
c. make an economic profit
d. expand output

Q19. Since all producers have the same average revenue under conditions of perfect competition, they all have the same profits in the short run.
a. true
b. false

Q20. If the entry of new firms in a perfectly competitive industry substantially increases the market demand for resources,
a. this reduces the market price of resources
b. this raises the market price of resources
c. the market price of resources does not change
d. this lowers the ATC curves of individual firms

Q22. Under conditions of perfect competition, profits exist whenever AR is above AVC at equilibrium output.
a. true
b. false

Q23. Under perfect competition, market price is determined by market demand and supply.
a. true
b. false

Q24. If one firm in a perfectly competitive industry is somehow able to produce at a lower cost than competing firms in the short run,
a. the competing firms will adopt similar production techniques in the long run
b. the more efficient firm will earn higher profits than the competing firms in the long run
c. the competing firms will earn higher profits than the more efficient firm in the short run
d. the competing firms will go out of business in the long run

a) What is the Fixed Cost of production (recall that it does not vary with output)

b) Calculate and graph (on the next page) Average Variable Cost, Average Fixed Cost, Average

Total Cost, and Marginal Cost.

Q VC TC

10 500 3000

20 800 3300

30 1350 3850

40 2300 4800

50 3750 6250

60 6000 8500

70 9450 11950

c) Explain why Average Variable Cost and Marginal Cost can fall initially,

but eventually rise.

d) If Fixed costs were to fall, how will that affect AFC, AVC, ATC, and

MC? Explain the intuition.

e) Explain the difference between the short-run and the long-run. How

does this concept relate to the data presented here?

f) Given a price of $145, how much of Good X will the perfectly competitive firm produce? How

much profit will the firm earn?

g) In the long run, if the market for X was made up of firms with the same cost structure,

what do you roughly expect the Perfect Competition market clearing price and per-firm

quantity to be? How much profit will they earn?

h) Given the following demand schedule, how much X would a monopoly produce, given the cost

table above? What price will they charge? How much profit will the firm earn?

Monopoly Demand:

P Q

$300 0

$270 10

$240 20

$210 30

$180 40

$150 50

$120 60

$90 70

1) When there is a competitive firm it will maximize profits at which output:

1. Total revenue and total cost are equal.
2 Total revenue exceeds total cost by the greatest amount.
3. Price exceeds average total cost by the largest amount.
4. The difference between marginal revenue and price is at a maximum.

2) Assume that QRS Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation:

1. Should close down in the short run.
2. Is maximizing its profits.
3. Is realizing a loss of $60.
4. Is realizing an economic profit of $40.

3) In a purely competitive industry:

1. There will be no economic profits in either the short run or the long run.
2. Economic profits may persist in the long run if consumer demand is strong and stable.
3. There may be economic profits in the short run, but not in the long run.
4. There may be economic profits in the long run, but not in the short run.

4) Assume a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. The firm will:

1. Minimizes losses by producing at the minimum point of its AFC curve.
2. Maximizes profits by producing where MR = ATC.
3. Should close down immediately.
4. Should continue producing in the short run.

5) A constant-cost industry is one in which:

1. If 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
2. If 100 units can be produced for $100, then 150 can be produced for $300, 200 for $600, and so forth.
3. The demand curve and therefore the unit price and quantity sold seldom change.
4. The total cost of producing 200 or 300 units is no greater than the cost of producing 100 units.

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EC120 Lecture Notes - Lecture 9: Average Variable Cost, Marginal Cost, Profit Maximization

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