Economics and Long-run Total Cost

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Quick Quiz: If Boeing produces 9 jets per month, its long-run total cost is $9.0 million per month. If it produces 10 jet pre month, it long-run total cost $9.5 million per month. Does Boeing exhibit economies or diseconomies of scale? * The long-run average total cost of producing 9 planes is $9 million /9 = $1 million. The long-run average total cost of producing10 planes is $9.5 million / 10 =$0.95 million. Since the long-run average total cost declines as the number of planes increases, Boeing exhibits economies of scale.

Quick Quiz: How does a competitive firm determine its profit-maximizing level of output? When does a profit-maximizing competitive firm decide to shut down? When does it decide to exit a market? * When a competitive firm doubles the amount it sells, the price remains the same, so its total revenue doubles.

* A profit-maximizing aggressive firm sets price equal to its minor cost. If price were above marginal cost, the firm could increase profits by increasing output, while if price were below marginal cost, the firm could increase profits by decreasing output. A profit-maximizing competitive firm decides to shut down in the short run when price is less than average variable cost. In the long run, a firm will exit a market when price is less than average total cost.

* In the long run, with free entry and exit, the price in the markets equal to both a firm’s marginal cost and its average total cost, The firm chooses its quantity so that marginal cost equals price; doing so ensures that the firm is maximizing its profit. In the long run, entry into and exit from the industry drive the price of the good to the minimum point on the average-total-cost curve.
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