1. Maximizing Profit with Cost Curves

2. 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)

3. 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)

4. 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!

5. Practice Free Response