All Flashcards
On a graph with MR and MC curves, what does the intersection point represent?
The profit-maximizing quantity of output.
How is marginal cost represented on a total cost curve?
Marginal cost is the slope of the total cost curve.
How is marginal revenue represented on a total revenue curve?
Marginal revenue is the slope of the total revenue curve.
On a graph, what does the area between the MR and MC curves represent when MR > MC?
Potential additional profit from increasing production.
On a graph, what does the area between the MC and MR curves represent when MC > MR?
The loss incurred from producing those units.
Explain how to find the profit-maximizing quantity using total revenue and total cost curves.
The profit-maximizing quantity is where the vertical distance between the total revenue and total cost curves is greatest.
What does a shift in the MC curve to the right indicate?
An increase in marginal cost at each level of output.
What does a shift in the MR curve to the left indicate?
A decrease in marginal revenue at each level of output.
How can you identify the break-even point on a graph of total cost and total revenue?
The break-even point is where the total cost and total revenue curves intersect.
What does the shape of the marginal cost curve typically look like, and why?
Typically U-shaped, reflecting decreasing marginal returns followed by increasing marginal returns.
A firm's MR > MC. What should it do?
Increase production to increase profits.
A firm's MC > MR. What should it do?
Decrease production to reduce losses or increase profits.
A firm is at MR = MC. What does this mean?
The firm is producing at the profit-maximizing level of output.
How does the MR = MC rule apply to a perfectly competitive firm?
The firm will produce where its marginal cost equals the market price (which is also its MR).
How does the MR = MC rule apply to a monopoly?
The firm will produce where its marginal cost equals its marginal revenue, but MR is not equal to price.
If a firm lowers its production, what happens to its cost?
The firm's total cost will decrease, but its average costs may increase or decrease depending on the cost structure.
If a firm increases its production, what happens to its revenue?
The firm's total revenue will increase, but its marginal revenue may decrease if demand is elastic.
How does understanding MR and MC help a small business owner?
It helps them determine the optimal level of production to maximize their profits, avoiding over or under production.
If a new technology lowers a firm's marginal cost, what happens to its profit-maximizing output?
The firm will likely increase its output because the MR=MC point will shift to a higher quantity.
How does the concept of profit maximization relate to resource allocation in an economy?
Firms seeking to maximize profit allocate resources to their most productive uses, leading to greater efficiency in the economy.
What is the difference between accounting profit and economic profit?
Accounting profit only considers explicit costs, while economic profit considers both explicit and implicit costs (opportunity costs).
Differentiate between short-run and long-run profit maximization.
In the short run, some costs are fixed. In the long run, all costs are variable, allowing for adjustments in plant size and other factors.
What is the difference between average revenue and marginal revenue?
Average revenue is total revenue divided by quantity, while marginal revenue is the additional revenue from selling one more unit.
How does profit maximization differ in perfect competition vs. monopoly?
In perfect competition, firms are price takers. In a monopoly, the firm has market power and can influence price.
What is the difference between increasing returns to scale and decreasing returns to scale?
Increasing returns to scale mean output increases more than proportionally to input increases. Decreasing returns to scale mean output increases less than proportionally.
What is the difference between fixed costs and variable costs?
Fixed costs do not vary with the level of output, while variable costs do.
Differentiate between economies of scale and diseconomies of scale.
Economies of scale occur when long-run average costs decrease as output increases. Diseconomies of scale occur when long-run average costs increase as output increases.
What is the difference between normal profit and economic profit?
Normal profit is the minimum level of profit needed to keep a firm in business, while economic profit is any profit above normal profit.
Compare and contrast explicit costs and implicit costs.
Explicit costs are direct, out-of-pocket payments. Implicit costs are opportunity costs of using resources already owned by the firm.
Differentiate between productive efficiency and allocative efficiency.
Productive efficiency is producing at the lowest possible cost. Allocative efficiency is producing the optimal mix of goods and services from society's point of view.