Question

4. Profit maximization in the cost-curve diagram

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    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    would be

 thousand per day in the short run.

Answer 1

As Figure 1 shows, an upward sloping marginal cost (MC) curve is the firm's supply curve. Therefore, in the short run, at a market price of $20 per wind chimes, this firm will produce 9 units or 9,000 wind chimes per day.

In Figure 1, the shaded area represents the profit area. That means this rectangle area indicates the firm's economic profit since the average total cost (ATC) is less than the price of the product.

The amount of profit can be calculated as follows:

$$ \begin{aligned} \text { Profit } &=\text { Total revenue - Total cost } \\ &=(\text { Maximum price } \times \text { Quantity })-(\text { Minimum price } \times \text { Quantity }) \\ &=(\$ 20 \times 9)-(\$ 16 \times 9) \\ &=\$ 180-\$ 144 \\ &=\$ 36 \end{aligned} $$

Thus, the profit is 36 or \(\$ 36,000\).

Answer 2

When the price is $20, the firm will produce at a point where the price = MC. So, at this level, the firm will produce 9 units. At this level of output, the ATC ($16) is less than the price ($20). Thus, the firm is earning a per-unit profit of $4. At Q=9, the firm is earning a total profit of $4 x 9 units = $36.