Slides By Timothy Diette and Kevin Brady Profit in Competition Begin Interactive Examples CoreEconomics, 2e 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

Answer 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. 1.What is the profit-maximizing output? 2.Shade the area on the graph that represents the firms profit when they sell the profit-maximizing number of shirts. 3.Calculate the firms profit when they sell the profit-maximizing number of shirts. Price $30 $40 $50 $60 120Number of Shirts Marginal Cost Price $20 $10 20 Profit in Competition Average Total Cost Interactive Examples

Next ANSWER: 1. 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 firms 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. Profit in Competition Price $30 $40 $50 $ Marginal Cost Price $20 $10 20 Average Total Cost Profit Number of Shirts Interactive Examples

ANSWER: 3.Calculate the firms 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 The End Profit in Competition Price $30 $40 $50 $ Marginal Cost Price $20 $10 20 Average Total Cost Profit Number of Shirts Interactive Examples