blanchard_ch10

At outputs of less than 4 sweaters and more than 12

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Unformatted text preview: utput rate achieves a larger profit. At outputs of less than 4 sweaters and more than 12 sweaters a day, the Campus Sweaters would incur an economic loss. At either 4 or 12 sweaters a day, the Campus Sweaters would make zero economic profit, called a break-even point. Total Revenue, Total Cost, and Economic Profit TC TR Quantity (Q ) Economic loss 300 (sweaters per day) Total revenue (TR ) Total cost (TC ) Economic profit (TR – TC ) (dollars) (dollars) (dollars) 0 0 9 12 Quantity (sweaters per day) 4 –20 66 –16 3 75 85 –10 4 100 100 0 125 114 11 150 126 24 175 141 34 8 Economic loss 45 50 7 100 25 2 6 Economic profit = TR – TC –22 5 183 22 1 225 0 200 160 40 Economic profit (dollars per day) 20 0 –20 –40 Economic loss 9 4 Profitmaximizing quantity (b) Economic profit and loss animation 12 Quantity (sweaters per day) EP 42 40 275 245 30 300 300 0 13 Economic profit 183 210 12 42 225 250 11 (a) Revenue and cost 9 10 325 360 –35 The table lists Campus Sweaters’ total revenue, total cost, and economic profit. Part (a) graphs the total revenue and total cost curves and part (b) graphs economic profit. Campus Sweaters makes maximum economic profit, $42 a day ($225 – $183), when it produces 9 sweaters a day. At outputs of 4 sweaters and 12 sweaters a day, Campus Sweaters makes zero economic profit—these are break-even points. At outputs less than 4 sweaters and greater than 12 sweaters a day, Campus Sweaters incurs an economic loss. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 199 T he Firm’s Output Decision Another way to find the profit-maximizing output is to use marginal analysis, which compares marginal revenue, MR, with marginal cost, MC. As output increases, the firm’s marginal revenue is constant but its marginal cost eventually increases. If marginal revenue exceeds marginal cost (MR > MC ), then the revenue from selling one more unit exceeds the cost of producing it and an increase in output increases economic profit. If marginal revenue is less than marginal cost (MR < MC ), then the revenue from selling one more unit is less than the cost of producing that unit and a decrease in output increases economic profit. If marginal revenue equals marginal cost (MR = MC ), then the revenue from selling one more unit equals the cost incurred to produce that unit. Economic profit is maximized and either an increase or a decrease in output decreases economic profit. Figure 10.3 illustrates these propositions. If Campus Sweaters increases its output from 8 sweaters to 9 sweaters a day, marginal revenue ($25) exceeds marginal cost ($23), so by producing the 9th sweater economic profit increases by $2 from $40 to $42 a day. The blue area in the figure shows the increase in economic profit when the firm increases production from 8 to 9 sweaters per day. If Campus Sweaters increases its output from 9 sweaters to 10 sweaters a day, marginal revenue ($25) is less than marginal cost ($27), so by producing the 10th sweater, economic profit decreases. The last column of the table shows that economic profit decreases from $42 to $40 a day. The red area in the figure shows the economic loss that arises from increasing production from 9 to 10 sweaters a day. Campus Sweaters maximizes economic profit by producing 9 sweaters a day, the quantity at which marginal revenue equals marginal cost. A firm’s profit-maximizing output is its quantity supplied at the market price. The quantity supplied at a price of $25 a sweater is 9 sweaters a day. If the price were higher than $25 a sweater, the firm would increase production. If the price were lower than $25 a sweater, the firm would decrease production. These profit-maximizing responses to different market prices are the foundation of the law of supply: Other things remaining the same, the higher the market price of a good, the greater is the quantity supplied of that good. FIGURE 10.3 Marginal revenue and marginal cost (dollars per sweater) Marginal Analysis and the Supply Decision 199 Profit-Maximizing Output MC Profitmaximization point 30 Loss from 10th sweater 25 MR Profit from 9th sweater 20 10 0 8 9 10 Quantity (sweaters per day) Quantity Total (Q ) revenue (sweaters (TR ) per day) (dollars) 7 175 8 200 9 225 10 250 11 Marginal revenue (MR ) (dollars per additional sweater) 275 . . . . . 25 . . . . . 25 . . . . . 25 . . . . . 25 Total cost (TC ) (dollars) 141 160 183 210 245 Marginal cost (MC ) Economic (dollars per profit additional (TR – TC ) sweater) . . . . 19 . . . . 23 . . . . 27 . . . . 35 (dollars) 34 40 42 40 30 The firm maximizes profit by producing the output at which marginal revenue equals marginal cost and marginal cost is increasing. The table and figure show that marginal cost equals marginal revenue and economic profit is maximized when Campus Sweaters produces 9 sweaters a day. The table shows that if Campus Sweaters increases output from 8 to 9 sweaters, marginal cost is $23, which is less than the marginal revenue of $25. If output increases from 9 to 1...
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This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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