TAILIEUCHUNG - Microeconomics for MBAs 37

Microeconomics for MBAs 37. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 11 Firm Production under Idealized Competitive Conditions cost curve than it receives in additional revenue as indicated by the demand curve which beyond q2 is below the MC curve . At q2 and anywhere else the firm s profit equals total revenue minus total cost TR - TC . To find total revenue we multiply the price Pi which also equals average revenue by the quantity produced q2 TR P1q2 . Graphically total revenue is equal to the area of the rectangle bounded by the price and quantity or 0Piaq2. Similarly total cost can be found by multiplying the average total cost of production ATC by the quantity produced. The ATC curve shows us that the average total cost of producing q2 computer chips is ATC1. Therefore total cost is ATC1q2 or the rectangular area bounded by 0ATC1bq2. The profits of the company are therefore P1q2 - ATC1q2 which is the same mathematically as q2 P1 - ATC1 . This quantity corresponds to the area representing total revenue OP1aq2 minus the area representing total cost 0ATC1bq2. Profit is the shaded rectangle bounded by ATC1P1ab. FIGURE The Profit-Maximizing Perfect Competitor The perfect competitor s demand curve is established by the market-clearing price part a . The profit -maximizing perfect competitor will extend production up to the point where marginal cost equals marginal revenue price or point a in part b . At that output level q2 the firm will earn a short-run economic profit equal to the shaded area ATC1P1ab. If the perfect competitor were to minimize average total cost it would produce only q1 losing profits equal to the darker shaded area dca in the process. The perfect competitor does not seek to produce the quantity that results in the lowest average total cost. That quantity q1 is defined by the intersection of the marginal cost curve and the average total cost curve. If it produced only q1 the firm would lose out on some of its profits shown by the darker shaded area dca. Suppose the firm is producing at q1. If it .

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