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Contribution Margin

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2a) Explain the relationship between P > AVC and a firm's contribution margin, when a firms is making a decision to shut down operations.

2b) Knowing that a profit maximizing firm would follow the MR = MC rule and in case of a perfect competitor P = MC rule;

If a perfectly competitive firm has the following cost function: MC = $150 + 0.005Q, calculate a profit maximizing level of output at the market price of $175.

2c) Given that a Monopoly's demand curve is less elastic than that of a perfect competitor, can a monopolist set just any high price and dare comsumers not to buy his/her products? What would be the concequences of such action by a monopolist?

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Contribution Margin in this case is considered. The expert explains the relationship between P>AVC and a firm's contribution margin.

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2a) Explain the relationship between P > AVC and a firm's contribution margin, when a firms is making a decision to shut down operations.

When P> AVC, CM (contributionMargin) of the firm is positive - the firm should look to reduce it fixed cost instead of ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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