Question

In: Economics

21. Be able to explain how firms decide: a) How much to produce? >>>>>>>>>> MC =...

21. Be able to explain how firms decide:

a) How much to produce? >>>>>>>>>> MC = MR

b) What price to charge? >>>>>>>>>> Where the demand is located.

c) What their profit is? >>>>>>>>>>>> TR – TC.

Solutions

Expert Solution

The firm's produce up to the point where the Marginal cost of hiring additional unit of labour is less than the Marginal revenue product of Labour. They continue to produce up to the point where MRPL = MFCL

The firm's generally attempts to maximize their profit.

Profit is defined as the difference between total revenue and total cost.

Profit = Total Revenue - Total Cost

The firm attempts to maximize profit. Differentiating the profit wrt Q we get

Now equating it to zero we get

Refer the attached picture below

B. Using the above relation that is MR = MC, the quantity is determined (Q0). Then this quantity is plugged in the demand function and the price (P0) is determined.

Refer the attached picture above.

C. The profit is the area above the ATC and below the price.

Profit = (P0 - ATC)Q0

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