Question 1 Flashcards
What is Fixed Cost
25 total cost at output level 1
What is variable cost
Total cost - Fixed Cost
What is Average Cost
Total cost/quantity
What is marginal cost
Look at TC and calculate the difference as it increases by one output
What is average profit?
Price - average cost
What is the goal of the competitive firm?
The goal is to maximise economic profit. Under perfect competition the profit maximising level is where P=MC
While output level 4 and 5, price and marginal cost is equal to $35 the assumption is that 2 output levels cannot sit between 2 quantities so average profit is used to see where average profit is maximised which is at output level 5
What graph is used in Q1?
Marginal cost is plotted
MR of 35 creates the straight line
Plot 1-7 against quantity and plot 25- 125 in price
Is the firm making a profit at profit maximising output level?
No the firm is making a loss
Profit =total revenue-total cost or 175-190=profit (15)
Do you think the firm will continue its production in the short run?
Although a firm is producing at a profit maximising output level they don’t necessarily make an economic profit ( in the short run equilibrium). The losing firm will continue production as long as it’s price above the shut down point
p=Minimum average cost
Firms can respond to economic loss by exiting the market.
The minimum average cost is 25, if price falls below 25 the firm will consider shutdown.
What will be the long run price in this market?
In long run in a perfectly competitive market each firm should operate at break even point ie price = min average cost.
As a result firms will exit the market, supply decreases, market price rises and economic loss decreases. The new equilibrium will be $38 equal min average cost.
What is total revenue?
Output X Price (35)
