Firm Entry Decision. Definitions  Average Cost (AC) = Total Cost (TC) ÷ The amount of output (Q) = A per-unit cost of output  Average Fixed Costs (AFC)

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Presentation transcript:

Firm Entry Decision

Definitions  Average Cost (AC) = Total Cost (TC) ÷ The amount of output (Q) = A per-unit cost of output  Average Fixed Costs (AFC) = Total Fixed Cost (TFC) ÷ The amount of output (Q)  Average Variable Costs (AVC) = Total Variable Cost (TVC) ÷ The amount of output (Q)

Experiment  If you were a businessperson, what factors will cause you to enter into a market to start your business?

Experiment  You will be an entrepreneurs today.  Decide whether to enter a market and how much to pay for a business license.

Experiment  Divide into groups of 3 to 5.  Each group will be a firm that has the option of buying a business license.  The licenses give you the right of publishing and selling a monthly magazine.  《最 in 時尚手冊》

Market Information No. of firms Price of magazine (HK$) Quantity of magazine per firm Average cost of a magazine (HK$)

Business License  Get a business license before entering the market.  The license allows a firm to operate the business for one month.  Each license’s bottom price is $5 and will be auctioned to the highest bidder.  Each firm can buy only one license.

License Bid Price License No. Bid Prices at Round I Bid Prices at Round II Bid Prices at Round III Bid Prices at Round IV Bid Prices at Round V

Profit Calculation  After the auction, firm with licenses auctioned should compute their profit.  Profit = [(Price – Average Cost ) * Quantity] – Price of License  Fill in Profit Record Sheet of Table 3.

Discussion  Did your group set the maximum bid-price for each license?  How much was that?  How did you come up with this maximum price?  Why you stopped bidding for a license when the price exceeded your maximum?

Discussion  What happens to your profit if more firms enter into the market?  Can you explain the reasons behind?  Can you identify the rule to decide whether or not to produce/ enter the market?