ECON 110Lecture 21Outline of Last Lecture I. Clicker QuestionsII. Competitive Marketsa. Marginal Revenueb. Maximizing ProfitIII. Long-Run EquilibriumOutline of Current Lecture I. Exam Detailsa. Detailsb. Overview of Chapters 13 and 14II. Clicker QuestionIII. Competitive Markets SummaryIV. Shut-down DecisionV. Profit EquationsCurrent Lecture – Review for Exam ThreeExam Details:- 45 questionso 29 regular multiple choiceo 16 problem-based multiple choice- Bring your pencil, ID, and scientific calculator- It covers chapters 13 and 14Chapter details to review:- Chapter 13:o Costs and profito Production and cost relationships Production function The short run:- Diminishing marginal product- Cost Curves The Long Run:- Cost CurvesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Economies and Diseconomies of scale- Chapter 14:o Market Structureso Perfect Competition Price-taking firms P = MRo Short Run Profit maximization: MR = MC (=P)o Profit = TR – TCo Firm Supply Curve: the part of the marginal cost curve that is less than the average cost curve.o Shut-down decisiono Long-run Equilibrium MC = ATC A particular output is associated with a priceClicker Quesiton:Sam operates a landscaping business and regularly takes care of twenty lawns, charging $30/ week. His weekly costs are $750, of which $160 are fixed. In the short run, Sam should…A. Shut down.B. Continue to operate, both in the short run and in the long run.C. Continue to operate in the short run but exit the market in the long run.D. Shut down now, but reopen later when the price rises. Answer: C. The total revenue ($600) is greater than the variable cost ($590), so it makes sense to operate in the short run. (D) does not work because you have no guarantee that the price will rise later. To summarize competitive markets…They require a fixed price, and many buyers and sellers who all have little influence over the price. They require homogenous (relatively equivalent) products. In the long run, the price will equal the marginal cost. The slope of the total cost curve is the marginal cost. Price is change in revenue (dR/dQ). Profit is total revenue minus total cost. - Price = MC- Profit = TR – TC- Total Revenue = Quantity X Price- Total Cost = Fixed cost + variable costsShut down decision: You will lose the fixed cost whether you shut down or remain open, so if you are going to shut down, the losses of remaining open must be greater than your fixed cost. If your revenue coversthe variable costs in the short run, don’t shut down in the short run.Profit Equasions:Accounting Profit = Total Costs – Explicit Costs (only explicit costs)Maximum Profit is where MR = MC (the derivative is 0)If MR > MC, the price will rise as production rises.If MR < MC, the price will rise as production
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