Ch. 8 How Firms Make Decisions: Profit Maximization - Custom Scholars
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Ch. 8 How Firms Make Decisions: Profit Maximization

question
The Goal of Profit Maximization
answer
We will view the firm as a single economic decision maker whose goal is to maximize the owner's PROFIT
question
Two Kinds of Profits
answer
Accounting- TR minus accounting costs, explicit cost
Economic- TR minus TC, explicit and implicit cost
question
Entrepreneurs' two contributions to production...
answer
Risk-taking and Innovation
question
The Demand Curve Facing the Firm
answer
tells us, for different prices, the Q of output that customers will choose to purchase from that firm OR tells us the maximum P the firm can charge to sell any given amount of output
question
Total Revenue
answer
the total inflow of receipts from selling a given amount of output
TR= P*Q
question
Profit Maximization Output Rule
answer
MR greater than or equal to MC
question
The TR and TC Approach
answer
1) Find profit, TR-TC
Loss: TC>TR
2) Profit maximizing level has the highest Profit amount
question
The MR and MC Approach
answer
Profit-maximizing output: MR greater than or equal to MC
question
Marginal Revenue
answer
The change in TR from producing one more unit of output, tells us how much revenue rises for unit increase in output
question
Relationship of TR and MR
answer
-when TR is going up, MR is positive
-when TR is going down, MR is negative
question
Marginal Approach to Profit
answer
A firm maximizes its profit by taking any action that adds more to its revenue than to its costs
question
SR and the Shutdown Rule
answer
If TR>TVC, keep producing
If TR=TVC, indifferent about shutting down or producing
If TR<TVC, shutdown
question
LR and Exit Decision
answer
A firm should exit the industry in the LR when- at its best possible output level- it would suffer a loss
1 of 13
question
The Goal of Profit Maximization
answer
We will view the firm as a single economic decision maker whose goal is to maximize the owner's PROFIT
question
Two Kinds of Profits
answer
Accounting- TR minus accounting costs, explicit cost
Economic- TR minus TC, explicit and implicit cost
question
Entrepreneurs' two contributions to production...
answer
Risk-taking and Innovation
question
The Demand Curve Facing the Firm
answer
tells us, for different prices, the Q of output that customers will choose to purchase from that firm OR tells us the maximum P the firm can charge to sell any given amount of output
question
Total Revenue
answer
the total inflow of receipts from selling a given amount of output
TR= P*Q
question
Profit Maximization Output Rule
answer
MR greater than or equal to MC
question
The TR and TC Approach
answer
1) Find profit, TR-TC
Loss: TC>TR
2) Profit maximizing level has the highest Profit amount
question
The MR and MC Approach
answer
Profit-maximizing output: MR greater than or equal to MC
question
Marginal Revenue
answer
The change in TR from producing one more unit of output, tells us how much revenue rises for unit increase in output
question
Relationship of TR and MR
answer
-when TR is going up, MR is positive
-when TR is going down, MR is negative
question
Marginal Approach to Profit
answer
A firm maximizes its profit by taking any action that adds more to its revenue than to its costs
question
SR and the Shutdown Rule
answer
If TR>TVC, keep producing
If TR=TVC, indifferent about shutting down or producing
If TR<TVC, shutdown
question
LR and Exit Decision
answer
A firm should exit the industry in the LR when- at its best possible output level- it would suffer a loss
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