A Firm’s Profit-maximizing Choices

Case 1 – zero profit (P = ATC at the profit maximizing Q)

Econ
TR $ MR $ TC $ AVC $ ATC $ MC $ Profit $
Q (P*Q) (∆ of TR/∆ of Q) (TFC+TVC) TVC $ (TVC/Q) (TC/Q) (∆ of TC/∆ of Q) (TR-TC)
0 0 NA 22 0 NA NA NA -22.00
1 20 20 45 23 23.00 45.00 23.00 -25.00
2 40 20 66 44 22.00 33.00 21.00 -26.00
3 60 20 85 63 21.00 28.33 19.00 -25.00
4 80 20 100 78 19.50 25.00 15.00 -20.00
5 100 20 114 92 18.40 22.80 14.00 -14.00
6 120 20 126 104 17.33 21.00 12.00 -6.00
7 140 20 141 119 17.00 20.14 15.00 -1.00
8 160 20 160 138 17.25 20.00 19.00 0.00
9 180 20 183 161 17.89 20.33 23.00 -3.00
10 200 20 210 188 18.80 21.00 27.00 -10.00
11 220 20 245 223 20.27 22.27 35.00 -25.00

Q1: What is the price? $

### Q2: What should be the output level?
Q3: What is the economic profit? $
$20 is the minimum of the ATC which is representing the break even point to earn zero profit.
Implications:

At Q = 8 units, P = ATC , the company is at the short run equilibrium in NORMAL times to earn ZERO
profit.

Case 2 – positive economic profit (P > ATC at the profit maximizing Q)

Econ
TR $ MR $ TC $ AVC $ ATC $ MC $ Profit $
Q (P*Q) (∆ of TR/∆ of Q) (TFC+TVC) TVC $ (TVC/Q) (TC/Q) (∆ of TC/∆ of Q) (TR-TC)
0 0 NA 22 0 NA NA NA -22.00
1 25 25 45 23 23.00 45.00 23.00 -20.00
2 50 25 66 44 22.00 33.00 21.00 -16.00
3 75 25 85 63 21.00 28.33 19.00 -10.00
4 100 25 100 78 19.50 25.00 15.00 0.00
5 125 25 114 92 18.40 22.80 14.00 11.00
6 150 25 126 104 17.33 21.00 12.00 24.00
7 175 25 141 119 17.00 20.14 15.00 34.00
8 200 25 160 138 17.25 20.00 19.00 40.00
9 225 25 183 161 17.89 20.33 23.00 42.00

Q1: What is the price? $

### Q2: What should be the output level?
Q3: What is the economic profit? $

At Q = 9 units, P > ATC , the company is at the short run equilibrium in GOOD times to earn POSITIVE
economic profit.

### The condition of profit-maximzing is to produce at the quantity at which the marginal revenue
equals the marginal cost and the market price.

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 Case 3 – negative economic profit / economic loss (P < ATC at the profit maximizing Q)
Econ
TR $ MR $ TC $ AVC $ ATC $ MC $ Profit $
Q (P*Q) (∆ of TR/∆ of Q) (TFC+TVC) TVC $ (TVC/Q) (TC/Q) (∆ of TC/∆ of Q) (TR-TC)
0 0 NA 22 0 NA NA NA -22.00
1 17 17 45 23 23.00 45.00 23.00 -28.00
2 34 17 66 44 22.00 33.00 21.00 -32.00
3 51 17 85 63 21.00 28.33 19.00 -34.00
4 68 17 100 78 19.50 25.00 15.00 -32.00
5 85 17 114 92 18.40 22.80 14.00 -29.00
6 102 17 126 104 17.33 21.00 12.00 -24.00
7 119 17 141 119 17.00 20.14 15.00 -22.00
8 136 17 160 138 17.25 20.00 19.00 -24.00
9 153 17 183 161 17.89 20.33 23.00 -30.00

Q1: What is the price? $

### Q2: What should be the output level? or
Q3: What is the economic profit? -$22  the total fixed cost
$17 is the minimum of the AVC which is representing the shut down point

At Q = 7 units, P < ATC and P = AVC , the company is at the short run equilibrium in BAD times. It is
indifferent for the firm to stay in the market or not with the same outcome  incurring a NEGATIVE
economic profit of $22 – the total fixed cost.

Case 4 – shut down temporarily

Econ
TR $ MR $ TC $ AVC $ ATC $ MC $ Profit $
Q (P*Q) (∆ of TR/∆ of Q) (TFC+TVC) TVC $ (TVC/Q) (TC/Q) (∆ of TC/∆ of Q) (TR-TC)
0 0 NA 22 0 NA NA NA -22.00
1 16.9 16.9 45 23 23.00 45.00 23.00 -28.10
2 33.8 16.9 66 44 22.00 33.00 21.00 -32.20
3 50.7 16.9 85 63 21.00 28.33 19.00 -34.30
4 67.6 16.9 100 78 19.50 25.00 15.00 -32.40
5 84.5 16.9 114 92 18.40 22.80 14.00 -29.50
6 101.4 16.9 126 104 17.33 21.00 12.00 -24.60
7 118.3 16.9 141 119 17.00 20.14 15.00 -22.70
8 135.2 16.9 160 138 17.25 20.00 19.00 -24.80
9 152.1 16.9 183 161 17.89 20.33 23.00 -30.90
Q1: What is the price? $
### Q2: What should be the output level?  shut down temporarily
Q3: What is the economic profit?

At Q = 7 units, P < ATC and P < AVC , the company is at the short run equilibrium in BAD times. The
firm should leave the market temporarily to minimize the loss at $22 – the total fixed cost.

### The condition of profit-maximzing is to produce at the quantity at which the marginal revenue
equals the marginal cost and the market price.

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 Case 5 – produce some units with an economic loss
Econ
TR $ MR $ TC $ AVC $ ATC $ MC $ Profit $
Q (P*Q) (∆ of TR/∆ of Q) (TFC+TVC) TVC $ (TVC/Q) (TC/Q) (∆ of TC/∆ of Q) (TR-TC)
0 0 NA 22 0 NA NA NA -22.00
1 17.1 17.1 45 23 23.00 45.00 23.00 -27.90
2 34.2 17.1 66 44 22.00 33.00 21.00 -31.80
3 51.3 17.1 85 63 21.00 28.33 19.00 -33.70
4 68.4 17.1 100 78 19.50 25.00 15.00 -31.60
5 85.5 17.1 114 92 18.40 22.80 14.00 -28.50
6 102.6 17.1 126 104 17.33 21.00 12.00 -23.40
7 119.7 17.1 141 119 17.00 20.14 15.00 -21.30
8 136.8 17.1 160 138 17.25 20.00 19.00 -23.20
9 153.9 17.1 183 161 17.89 20.33 23.00 -29.10
10 171
Q1: What is the price? $ 17.1 210 188 18.80 21.00 27.00 -39.00
### Q2: What should be the output level?  produce some outputs
Q3: What is the economic profit? $

At Q = 7 units, P < ATC and P > AVC , the company is at the short run equilibrium in BAD times. The
firm should stay in the market even though it is incurring a loss  $21.3 – a loss less than the total
fixed cost $22.

The supply curve of a FIRM:

is the same as the MC curve at prices above the minimum point of average variable cost curve
(AVCmin).
When the p is $16.9, Qs is
When the p is $17, Qs is
When the p is $17.1, Qs is
When the p is $20, Qs is
When the p is $25, Qs is

Output, Price, Profit In The SHORT RUN

Steps in drawing the market-firm diagram which must be aligned HORIZONTALLY.

Market diagram (topic 2)
1. Draw the market diagram with proper market title. axes (Price & Quantity), Demand and Supply
curves
2. Indicate the Pe and Qe
Firm diagram (topic 6)
1. Draw the firm diagram with proper firm title, axes (cost/revenue or $, quantity)
2. Draw the MR curve that determine the p which is aligning the price determined in the market
diagram
3. Draw the MC curve that determine the q produced by the firm
4. Draw the ATC curve that determine the profit states of the firm at the quantity produced
- P > ATC, economic profit
- P = ATC, zero profit
- P < ATC, economic loss
-

### The condition of profit-maximzing is to produce at the quantity at which the marginal revenue
equals the marginal cost and the market price.
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1. Short-Run Equilibrium in Normal Times (earn zero economic profit) – Case 1

2. Short-Run Equilibrium in Good Times (earn positive economic profit) – Case 2

3. Short-Run Equilibrium in Bad Times (earn negative economic profit) – Case 5