MC: marginal cost, or the cost of selling one more unit of output, y.MR: marginal revenue, or the revenue generated from selling one more unit of output, y.The firm will make marginal (i.e., small) changes in variables in order to gradually increase profits until it reaches the maximum level of profit at which further changes will lead to a zero or negative change. In the short run, employment is a choice variable but plant size is not. Choice variables: the variables that the firm can control.(c) How does the firm determine the actions that maximize its profits? (a) What actions are under the firm’s control? In order to reach its profit-maximizing goal, the firm must answer: Supernormal profit: positive economic profit, generated when accounting profit exceeds normal profit.Ī firm may generate positive accounting profit even as it generates negative economic profit.Normal profit: the profit that the firm would accrue if its assets were used in the next best alternative.Total costs include both explicit costs and the implicit costs of not generating the profit available in the next best alternative. Economic profit: revenues less total costs.Accounting profit: revenues less explicit costs.The demand for labor is a derived demand, since the firm hires labor, buys capital, and purchases inputs with the derivative goal of maximizing profits. (c) The constraints restricting the firm’s actions are (b) The firm’s goal is to maximize its profits (Assumption 3.1). The neoclassical microeconomic framework asserts that
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