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Unit 3.2 Perfect Competition Review. $20 15 10 5 0 Cost and Revenue MC AVC ATC 14 Should the firm produce? What output should the firm produce? What is.

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Presentation on theme: "Unit 3.2 Perfect Competition Review. $20 15 10 5 0 Cost and Revenue MC AVC ATC 14 Should the firm produce? What output should the firm produce? What is."— Presentation transcript:

1 Unit 3.2 Perfect Competition Review

2 $ Cost and Revenue MC AVC ATC 14 Should the firm produce? What output should the firm produce? What is TR at that output? What is TC? How much profit or loss? 6 MR=D=AR= P Yes 10 TR=$140 Profit=$40 TC=$100 #1 2 Q

3 $ Cost and Revenue 5 7 MC MR=D=AR=P AVC ATC 11 What output should the firm produce? What is TR at MR=MC point? What is TC at MR=MC point? How much profit or loss? 9 Loss=Only Fixed Cost $5 Zero Shutdown (Price below AVC) $45 $55 #2 3 Q

4 $ Cost and Revenue 6 8 MC MR=D=AR=P AVC ATC What output should the firm produce? What is TR at that output? What is TC? How much profit or loss? 6 $90 $120 Loss= $30 #3 4 Q

5 $ Cost and Revenue MC AVC ATC MR=P How much is the profit or loss? What is TR?What is TC? Where is the Shutdown Price? $300$250 $50 $22 22 Profit/Loss per unit? $5 #4

6 P Q MC ATC Quantity Price Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point). Is this Productively Efficient? Profit D=MR

7 P Q MC ATC Quantity Price Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point). Is this Productively Efficient? Loss D=MR

8 $5 MR 15 MC Quantity Price The marginal benefit to society is greater the marginal cost. Not enough produced. Society wants more Is this Allocative Efficient? 20 Underallocation of resources $3

9 $5 MR 22 MC Quantity Price The marginal benefit to society is less than the marginal cost. Too much Produced. Society wants less 20 Overallocation of resources $7 Is this Allocative Efficient?

10 1. Is this firm in the short run or the long run? Explain. The firm is in the short-run since it is generating profits (points: iecP)

11 2. What quantity should this individual firm produce? Why? MR=MC at q3

12 3. What is the area of total revenue? points: q3cp

13 4. What is the area of total cost? points: ieq3

14 5. What is the area of profit? points: iecp

15 6. What will happen in the long run? Why? Market supply will increase due to entrance of firms because of the short- run profits. Market price will fall causing MRDARP to decrease resulting in the firm operating at normal (zero) economic profit which is both allocative and productively efficient.


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