Profits for Competitive and Monopolistic Firm2

Profits for Competitive and Monopolistic Firm2 - ideal...

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Profits for Competitive and Monopolistic Firms Profit If we can combine a firm's costs and revenues, we can calculate the firm's profits. Using the variables we have been working with, we can represent profit as: Profit = TR - TC TR - TC = q(AR - AC) = q(P - AC) Profit = q(P - AC) Firms will try and maximize their profits, since it is through increasing profits that firms increase their utility. To maximize profits, firms will choose to sell the quantity at which the marginal cost is equal to the marginal revenue. Why is this true? If MC were greater than MR, then the firm would be losing money for each additional unit of product. If MR were greater than MC, the firm would be losing out on extra profit by not making another unit. The following graph shows this
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Unformatted text preview: ideal quantity as q*. The shaded region is the amount of profit that the firm generates: Figure %: Calculating Profit The amount of profit will appear as a rectangle whose length is the distance between average cost and average revenue (since that reflects the average amount gained per unit) and whose width is the number of units sold. To calculate the actual amount of the profits, you would multiply the length (dollars per unit) and the width (quantity) of the shaded rectangle. It is possible for profits to be negative (in the case that the "profit" rectangle is above the average revenue curve, instead of below it....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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