Maximizing Profit with Cost Curves

Review: Cost Curve Model Economic Profit = (P – ATC) X QTY MC hits both ATC & AVC at minimum ATC illustrates areas of both: Economies of scale (falling ATC) Diseconomies of scale (rising ATC)

Profit Maximization Marginal Cost (MC) = cost of making one more unit Marginal Revenue (MR) = amount received by selling one more unit Maximize profit where MR = MC Why does MR = MC maximize profit? Since MC is rising => you will “break even” on the last unit sold. That means you make economic profit on all previous units sold (MC < MR for all previous units)

Profit Maximization Maximize profit where MR = MC Assume a firm can sell any quantity produced at $10 per unit $10 D = MR Economic Profit Firm sets MC = MR & produces that qty If P > ATC, firm is earning economic profit! ------------------------------------ --------------------------------

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