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Achievement of Maximum Profit - Essay Example

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The author states that for achieving maximum profits firms have to sell its products at the maximum price customers are willing to pay. Profit maximization requires that all means to lower the average cost of producing the current output with the current facility must have been exhausted…
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Download file to see previous pages When companies utilize their equipment more extensively maintenance and repairs cost increase. Companies that increase their labor shifts incur in higher labor costs.
Average total costs equal total costs divided by quantity. The average total cost curve is U-shaped. Subtracting average fixed costs is the formula for the average variable cost. The AVC curve lies vertically below the ATC curve by the amount of the AFC. The ATC and the AVC curve never touch because the AFC never falls to zero. The total variable cost is measured by the vertical distance between the horizontal TFC lines. The AVC curve bottoms out at a lower level for Q than does the ATC curve. The marginal costs measure the increase in total cost as output Q increases by one unit. Marginal cost is less than both average total cost and average variable cost. Due to the fact that marginal costs are less than both average total cost and average variable cost the ATC and AVC falls. The ATC and AVC falls because of the MC. The marginal cost curve cuts through the AVC curve at the bottom of the AVC curve. The MC curve cuts through the ATC curve at the bottom of the ATC curve.
The ATC, AVC, and MC curves are all U-shaped. The vertical gap between AVC and ATC curves steadily diminishes as Q increases. These curves never touch. Businesses have options available with respect to how much output they want to be able to produce. Economies of scale help organizations reduce their costs. Larger scale operations have higher administrative expenses. Economies of scale help reduce administrative costs. When companies incur in diseconomies of scale their operating costs rise. The LRATC curve shows the lowest average total cost at which any given level of output can be produced. The LRATC curve is made up entirely of points on the firm’s alternative ATC curves. ...Download file to see next pagesRead More
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