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Profit Maximizing Rule
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A company will continue to produce a good until the marginal cost to produce the next good is greater than the marginal revenue.
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Marginal Cost
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Looks like a Nike Swoosh.
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Average Total Cost
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Looks like a U
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Profit
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= Total Revenue (Average Revenue Quantity) - Total Cost (Average Total Cost Quantity)
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The Shut-Down Rule
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A firm should stop production if the price (marginal revenue) they sell each good for falls below its minimum possible Average Variable Cost (the average cost for variable resources at that output).
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Per-Unit Tax on an individual company
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This government action will increase the cost per-unit for a business. This will decrease (shift left) Marginal Cost, increase AVC, and increase ATC.
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Per-Unit Subsidy on an individual company
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This government action will decrease the cost per-unit for a business. This will increase (shift right) Marginal Cost, decrease AVC, and decrease ATC.
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Lump-Sum Tax on an individual company
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This government action will increase the fixed costs for a business. This will increase ATC.
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Lump-Sum Subsidy on an individual company
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This government action will decrease the fixed costs for a business. This will decrease ATC
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Efficiency
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The ratio of productivity versus the amount of resources used to obtain that productivity.
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Productive Efficiency
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When a company or country produces in the least costly way. Use minimum resources to maximize production. Graphically, a perfectly competitive firm is productively efficient when it chooses the output (quantity, total product) that minimizes Average Total Cost.
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Allocative Efficiency
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When a company or country produces the correct amount to satisfy societal demand. Graphically, a perfectly competitive firm is allocatively efficient when it chooses the output (quantity, total product) where its marginal cost is equal to the price it charges.
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