Profit Maximisation

Question 1

Normal profit

Answer 1

The transfer of earnings of the entrepreneur (minimum reward necessary to keep business afloat)

Question 2

Why is normal profit a fixed cost?

Answer 2

Because the activities of the entrepreneurs are independent of the level of output

Question 3

Determinants of normal profit

Answer 3

Depends on the expected returns available in other industries vs. The risk involved in their current one

Question 4

Formula for normal profit

Answer 4

Average revenue = average cost <-> revenue per unit (total revenue) = cost per unit (total cost)

Question 5

Supernormal profit

Answer 5

The difference between revenue and cost

Question 6

Profit maximisation condition

Answer 6

Supernormal profit is maximised where MR=MC, implying marginal profit is 0

Question 7

Profit maximising condition

Answer 7

A firm must set MR=MC with MC rising.
Right of point = adding extra unit of output will diminish profits
Left of point = adding extra unit of output will increase profits