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15-Profit Max in SR

15-Profit Max in SR - Profit Maximization Choosing Output...

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1 Profit Maximization: Choosing Output in the Short-Run The Short-Run Supply Reading: Chapter 8

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2 Two steps to maximizing profit To maximize its profit, any firm (not just competitive firms) must answer two questions: Output decision : if the firm produces, what output level, q *, maximizes its profit or minimizes its loss? Shut-down decision : is it more profitable to produce q * or to shut down and produce no output?
3 q 2 Competitive Firm: Profit-Maximizing Output 10 20 30 40 Price 50 MC AVC ATC 0 1 2 3 4 5 6 7 8 9 10 11 Output q * AR=MR=P A q 1 : MR > MC q 2 : MC > MR q*: MC = MR q 1 Lost Profit Lost Profit

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4 Competitive Firm: Positive Profit 10 20 30 40 Price 50 0 1 2 3 4 5 6 7 8 9 10 11 Output q 2 MC AVC ATC q * AR=MR=P A q 1 D C B Profit per unit = P-ATC(q*)= AB Total Profit = ABCD
5 Competitive Firm: Loss Price Output MC AVC ATC P = MR D At q * : P < ATC Losses = (ATC- P) x q * = ABCD q * A B C

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6 Competitive Firm in the SR: Produce or Shut Down? P > ATC: firm is making positive profits P = ATC: firm is breaking even P < ATC: firms incurs losses Should it shut down if it is making a loss? It depends.
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