03 Jun Question (1) Marginal revenue is the addition to a firm’s total revenue when the firm produces one additional unit of output and sells this unit of output
Question
(1)
Marginal revenue is the addition to a firm’s total revenue when the firm produces one additional unit of output and sells this unit of output at the market price. Knowing that MR = dTR/dq, prove that the marginal revenue to the firm is usually below but at under specific conditions equal to the average revenue (AR) of the firm.
(2)
Given your answer in (1) above, what must we know about the price elasticity of demand on the demand curve when a firm lowers in price in order for total revenue (TR) to rise, pretty much stay the same, or fall?
(3)
What is meant my atomaticity in a market? In a market where atomaticity exists, what does this means for the price elasticity of demand facing a firm. What is the shape of the
demand curve facing this firm? What does this mean for the relationship between MR, AR, and P at the profit maximizing point of production for the firm?
(4)
Your firm faces a short run average cost curve SRAS that has an average cost per unit of output at $6.00 at its minimum point. Your firm faces a demand curve that falls below the minimum point of the SRAS. What should the firm do in the short run? If the firm follows your advice in the short run, what is the firm maximizing or minimizing? If the demand curve remains where it is, what should the firm do in the long run? In the REAL WORLD, if in the long run, the firm wants to be successful, what two main choices does it have?
(5)
Why is the marginal cost curve the supply curve for a firm that maximizes it profits? Explain your answer with a graph. Show the areas of profits for any price that the firm may face.
(6)
Let’s pretend that you are in the shelter-building business. You construct dwellings for people in your community.
However, you are losing money in your business. You are in the short run. You are able to determine your cost schedule (SRAC and SRMC curves) as well as the demand function that you face. Draw your current situation on a graph.
You decide that you want to stay in the shelter business as you wait for the long run. What must happen on your graph to make this possible and how do you intend do go about changing the conditions shown by your graph.
(7)
Now, from (6) above, assume that in the shelter-building business, you use capital and labor (your time, effort, mind-power, etc.) to produce your shelters. Your cost curves from (6) employ a cost-minimizing strategy. You build five shelters a month. Draw an isoquant diagram that illustrates where you are in the SR money-losing situation. So, according to your diagram, you could do better cost-wise and still be able to build the five monthly shelters. What condition(s) have to be met for you to be sure that you are truly minimizing your costs of production at the rate of 5 shelters per month?
As you move into the long-run (LR), assume that you are indeed successful in remaining in business. How mig
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