Principles of Economics: Output Decisions in Perfect Competition

Front

What is the profit formula in perfect competition?

Back

Profit = Total revenue – Total cost.

Front

How is total revenue calculated in perfect competition?

Back

Total revenue = (price)(quantity produced)

Front

What happens to total revenue if a firm produces more of the item?

Back

Total revenue will increase.

Front

What is the relationship between costs and profit?

Back

As costs go up, profit goes down.

Front

What is the shutdown point?

Back

The shutdown point is the point at which it makes no economic sense to produce the good, including variable and fixed costs.

Front

What should a firm do if the price is less than the minimum average variable cost?

Back

The firm should shut down.

Front

What does MR = MC signify?

Back

It signifies the profit maximizing point where marginal revenue equals marginal cost.

Front

What are fixed costs?

Back

Fixed costs are expenses that occur regardless of production, such as rent and salaries.

Front

What is the significance of the average variable cost (AVC) in production decisions?

Back

If AVC is less than marginal revenue, it is better to keep producing; if AVC is more, the firm should stop production.

Front

What are the three zones in the marginal cost curve?

Back

1) Profit zone (above break-even point), 2) Continue producing zone (between average cost and average variable cost), 3) Shutdown zone (below average variable cost).