Wednesday, July 11, 2007

Can companies compete when marginal costs are zero?

In this section of the course you are learning about the profit-maximizing behavior of competitive firms. Chapter 8 introduced you to the different types of costs that firms face. One big distinction is between fixed costs and marginal costs. From Chapter 9 you learn that a profit-maximizing firm should produce its output up to the point where marginal revenue (MR) equals marginal cost (MC). The blog entry linked above compares two different industry settings, each with high fixed costs but very different marginal costs: the auto industry and the movie making industry.

Do you agree with the author's characterization of the marginal costs in each industry? Why or why not?

Do you agree with the author's contention that competition will occur to the same extent in each industry?

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