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U of M ECON 1101 - Profit Maximizing

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ECON 1101 1st Edition Lecture 24 Outline of Last Lecture II Consumer Theory III Theory of the Firm a Costs b U Shaped Average Cost c Constant Return to Scale d Economics of Scale e Short run supply of a firm Outline of Current Lecture IV Diminishing Marginal Returns V Economies of Scale Current Lecture The more you make average cost goes down TC aQ 2 bQ C A b and C are parameters Different countries have different parameters C fixed cost b variable cost that is proportionate to output A when positive A is increasing marginal cost diminishing returns Average total cost falls then decreases it Is GOOD to keep producing Add expensive high units raise average cost Constant returns to scale line is horizontal Increasing returns to scale line is decreasing Decreasing returns to scale line is increasing Constant returns to scale cost doesn t change MC ATC These 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 Example where economies of scale is most important pharmaceuticals software jumbojet discount retailing Market Price 1 then sell take P price as given Marginal Revenue how much money you bring in MR profit Compare with marginal cost Quantity at which MC MR is profit maximizing quantity Profit CANNOT be maximized if MC MR produce less MR MC produce more MC MR Rule for profit maximizing MR MC distinct between short and long term Short term fixed cost CANNOT be avoided


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