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chapter8-1

chapter8-1 - Chapter 8 The Profit-maximizing Price and...

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Chapter 8: The Profit-maximizing Price and Quantity. Now we are ready to put revenue and cost together to find the point on the demand curve that the firm should choose to maximize its profit. Our strategy is to figure out how much the firm should produce. Then the demand curve will tell us the profit-maximizing price. A. Using the revenue and cost curves to find the profit-maximizing quantity. Figure 8.2(b) shows how to use the revenue and cost curves to find the profit-maximizing quantity. Suppose that the firm’s demand curve is described by Table 8.1. You should know (from Chapter 3A) how to calculate the revenue curve for this demand curve, and Figure 8.2(b) shows that revenue curve. Figure 8.2(b) also shows the cost curve from Table 7.1 and Figure 7.2(b). Our old formula, Profit = Revenue - Cost, shows that when revenue exceeds cost (as it does for Q=1 to Q=9), the gap between the revenue and cost curves is profit. When cost exceeds revenue, the gap between the two curves represents a loss. For instance, at Q=10, Profit = Revenue - Cost = \$250-\$270 = -\$20. It would be better to produce nothing at all (and earn zero profits) than to produce Q=10. To earn the highest profits, the firm should produce where revenue exceeds cost by the largest amount. On Figure 8.2(b), this is where the gap between the curves is the largest, at Q=6. Figure 8.2(c) shows a different way to find the profit-maximizing quantity, based on a graph of profits. Figure 8.2(c) graphs profits as a function of quantity, based upon the revenue and cost curves of Figure 8.2(b). To maximize profits, the firm should sell Q=6 units. You should understand Figures 8.2(b) and 8.2(c) completely before going on to Figure

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chapter8-1 - Chapter 8 The Profit-maximizing Price and...

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