Week 2

Question 1

Profit function

Answer 1

profit= TR-TC
profit= AR*Q-ATC*Q

Reminder: price is average revenue and marginal revenue in perfect competition

Question 2

Break even point

Answer 2

intersect MC and ATC

There is zero profit

Question 3

Intersect Marginal cost curve and average cost curves

Answer 3

marginal cost curve intersects the average cost curves at their minimum

Question 4

Shut down point

Answer 4

intersect marginal cost and average total cost

price lower than AVC-> close down firm

Question 5

Maximum profit

Answer 5

Price (=MR) should be equal to marginal cost

MC= change in TC/ change in q

Question 6

Supply curve format in graph

Answer 6

Supply curve is marginal cost line above the shut-down point (intersect AVC and MC)

Question 7

Consumer surplus definition

Answer 7

the extra benefit due to a consumption of intramarginal units which have a larger utility than the price paid
! area between the demand curve and the price level

Question 8

Producer surplus

Answer 8

extra benefit due to the sale of
intramarginal units that a firm also would have sold for a lower price (because of lower marginal costs
– The area between the price level and the supply curve

Question 9

Potential pareto improvement

Answer 9

this improvement creates a new situation where in theory the winners are still capable of compensating the losers completely, while the winners themsekves still have some benefits left (compensation doesn’t take place)