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 |  Economics, 6/e Stephen L. Slavin
Profit Maximization
Extra Help with Math & GraphsChapter 21. Profit Maximization#1: Calculating Total Profit
We know that a business firm will always strive to maximize its profit. To do that, it always produces at that output at which marginal cost = marginal revenue. So when we ask you to calculate a firm's total profit, we assume that that firm is producing at the output at which MC = MR.
Suppose that a firm is producing at an output of 6.4, that price = $20, and that ATC at an output of 6.4 is $17.25. How much is the firm's total profit?
Solution: We use this three-step solution: Write down the formula for total profit, plug in the numbers, and solve.
| Total Profit | = | Output (Price - ATC) | | = | 6.4 ($20 - $17.25) | | = | 6.4 ($2.25) | | = | $14.40 |
Problem: Find the total profit of a firm that is producing at an output of 7.3 with a price of $85 and an ATC is $53.
Solution:| Total Profit | = | Output (Price - ATC) | | = | 7.3 ($85 - $53) | | = | 7.3 ($32) | | = | $233.60 |
#2: Calculating Total Loss
If a company with an output of 125 and an ATC of $36.44 charges a price of $31, it will lose money. Assuming that it is operating at that output at which MC = MR, then it is minimizing its loses. We can calculate those losses using the same formula that we use to calculate total profits. The big difference is that we'll get a negative number for total profit. Go ahead and find the total loss for this company.
Solution: | Total Profit | = | Output (Price - ATC) | | = | 125 ($31 - $36.44) | | = | 125 (-$5.44) | | = | -$680 |
A total profit of -$680 is a loss of $680. |
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2002 McGraw-Hill Higher Education