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Slides By Timothy Diette and Kevin Brady

Interactive Examples. Profit in Competition. Begin. To navigate, please click the appropriate green buttons. (Do not use the arrows on your keyboard). Material from this presentation can be found in: Chapter 8. Slides By Timothy Diette and Kevin Brady. CoreEconomics, 2e.

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Slides By Timothy Diette and Kevin Brady

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  1. Interactive Examples Profit in Competition Begin To navigate, please click the appropriategreenbuttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 8 Slides By Timothy Diette and Kevin Brady CoreEconomics, 2e

  2. Interactive Examples Profit in Competition • QUESTION: • The firm is a producer of shirts in a competitive market. The market price for shirts is $40. The marginal cost and average cost of the firm are shown in the graph on the right. • What is the profit-maximizing output? • Shade the area on the graph that represents the firm’s profit when they sell the profit-maximizing number of shirts. • Calculate the firm’s profit when they sell the profit-maximizing number of shirts. Price Marginal Cost $60 Average Total Cost $50 $40 Price $30 $20 $10 20 40 60 80 100 120 Number of Shirts Answer

  3. Interactive Examples Profit in Competition • ANSWER: • What is the profit-maximizing output? • The profit-maximizing output is where marginal revenue or price is equal to the marginal cost. This occurs at the output of 80 shirts. • 2. Shade the area on the graph that represents the firm’s profit when they sell the profit-maximizing number of shirts. • The revenue per unit is the price of $40. The cost per unit is the average cost at the profit-maximizing output of 80 units or $30. The profit per unit is the difference between the price and cost per unit or $40 - $30 = $10 per unit. This is the vertical distance between the price and average cost curves at the quantity of 80. The profit per unit multiplied by the 80 units is the total profit and is represented by the blue rectangle. Next Price Marginal Cost $60 Profit Average Total Cost $50 $40 Price $30 $20 $10 20 40 60 80 100 120 Number of Shirts

  4. Interactive Examples Profit in Competition • ANSWER: • Calculate the firm’s profit when they sell the profit-maximizing number of shirts. • The profit is the area of the blue rectangle. The area of a rectangle = base X height • The base is the number of shirts or 80. The height is the profit per unit or • $40 - $30 = $10. • Profit = 80 X $10 = $800 Price Marginal Cost $60 Profit Average Total Cost $50 $40 Price $30 $20 $10 20 40 60 80 100 120 Number of Shirts The End

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