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4. Profit maximization in the cost-curve diagram
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Suppose that the market for wind chimes is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.
Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point.
In the short run, at a market price of $20 per wind chime, this firm will choose to produce ......... ADVERTISEMENT ......... ..8.. wind chimes per day.
On the preceding graph, use the blue rectangle (circle symbols) to shade the area representing the firm’s profit or loss if the market price is $20 and the firm chooses to produce the quantity you already selected.
Note: In the following question, enter a positive number, even if it represents a loss.
The area of this rectangle indicates that the firm’s ......... ADVERTISEMENT ......... ..8.. would be $ thousand per day in the short run.
In the context of a economic system that is free and market-based, productively efficient firms can optimize their manufacturing process by reducing costs that are consistent with every potential level of production which results in the cost curve.
Figure 1 illustrates that the firm’s supply curve has an upward-sloping marginal costs (MC) curve. This means that at a market price $20 per chimes, the firm will produce 9 units per day or 9,000 windchimes.
Figure 1 shows the profit area. This rectangle represents the firm’s economic profit, since the average total costs (ATC) are less than the product price.
Here are the steps to calculate your profit:
The profit is thus 36 or $ 36,000.