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ECO 108 Lecture Notes - Lecture 23: Marginal Revenue, Marginal Cost, Equilibrium Point

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School
University of Rochester
Department
Economics
Course
ECO 108
Professor
landsburg

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Document Summary

A change in fixed costs has no effect on a firm"s supply curve. Profits are negative at all quantities, but assuming this firm has got to operate, the best they can do their profit maximizing quantity is still four. If the firm is in business they are still going to produce quantity four, even with much higher fixed costs. Once again no point on the supply curve has changed; the supply curve hasn"t changed. We know that for a competitive supplier, the supply curve is the marginal cost curve. Fixed costs do not affect marginal costs, so a change in fixed costs does not affect the supply curve. When fixed costs change, only one of two things can happen as a result: (1) the firm continues to operate just as before; or (2) the firm gets out of the industry entirely, but that typically takes time.

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Related Questions

This was asked before but never answered:

This graph shows the demand for cable TV services in a town of 50,000 households. The local government has given a monopoly franchise to a cable company. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for cable TV services. Notice that the firm's monthly marginal cost is constant at $10 per household. Assume that in the long run, the cable company can avoid any fixed costs if it stops providing service in this community.

http://courses.aplia.com/problemsetassets/micro/Lemke_Monopoly_II/cable.gif

5.1. True or False: The firm has no fixed costs.

5.2. What price and quantity combination will the monopolist choose to maximize profits?

5.3. How much profit does the monopolist earn each month?

5.4. Suppose the government forces the cable company to set price equal to marginal cost. In the long run, how many households would the cable company choose to supply at this price?

Question 13 (1 point)

A firm that has not shut down in the short run will not shut down in response to a decrease in the marginal costs.

Question 13 options:

  1) True
  2) False

Question 14 (1 point)

Saved

A firm earns a positive economic profit when the market price exceeds its marginal cost.

Question 14 options:

  1) True
  2) False

Question 15 (1 point)

For prices greater than the minimum value of average variable cost, the firm's short-run supply curve coincides with its short-run marginal cost curve.

Question 15 options:

  1) True
  2) False

Question 16 (1 point)

Saved

The number of firms in an industry is fixed in the short run.

Question 16 options:

  1) True
  2) False

Question 17 (1 point)

When a competitive firm earns zero profit, the market price is equal to both the firm's average and marginal costs.

Question 17 options:

  1) True
  2) False

Question 18 (1 point)

Saved

If the market price is currently above the shut-down price, the firm will be making positive profits.

Question 18 options:

  1) True
  2) False

Question 19 (1 point)

A competitive firm's supply curve is identical to its marginal cost curve.

Question 19 options:

  1) True
  2) False

Question 20 (1 point)

Saved

There is no reason for a competitive firm to stay in business if it is making zero profits.

Question 20 options:

  1) True
  2) False

A. A competitive firm

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

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

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

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. 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

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

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

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

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

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

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

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

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

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

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

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.