5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

120 › Step 4. Review the Knowledge You Need to Score High

Short-Run Profit and Loss

To maximize profit, the firm must choose the level of output (qe) where MR =MC. But

how can we use Figure 9.2 to identify these profits? A little algebra goes a long way.

P=TR -TC =P¥qe-TC. If you divide both terms by quantity and remember that

TC/q=Average total cost (ATC), you have

P=qe¥(P -ATC)

The term (P-ATC) is the per unit difference between what the firm receives from the

sale of each unit and the average cost of producing it, or profit per unit. When you multiply

this per unit profit by the number of units (qe) produced, you have total profit. Table 9.3 and

Figure 9.3 incorporate the ATC into our carrot farmer’s profit-maximizing decision table.

Table 9.3

DAILY BUSHELS TOTAL AVERAGE

OF CARROTS COST TOTAL COST PROFIT (P)

(q) PRICE (P) (TC) (ATC) (P - AT C ) =q¥(P - AT C )

0 $11 $16 -$16

l $11 $22 $22 -$11 -$11

2 $11 $27.50 $13.75 -$2.75 -$5.50

3 $11 $34 $11.33 -$.33 -$1

4 $11 $42 $10.50 $.50 $2

5 $11 $53 $10.60 $.40 $2

6 $11 $65 $10.83 $.17 $1

Profit Rectangles and Flying Monkeys

Everyone remembers The Wizard of Ozand the critical instructions that the people of

Munchkinland gave Dorothy and Toto as they set off to find the Wizard: “Follow the

yellow brick road.” And when Dorothy, Toto, and friends stayed on the yellow brick road,

Quantity

d = P = MR = AR

AT C

MC

qe = 5

10.60

11

Profit = 5×($11 – $10.60)

$ One Carrot Farmer

Figure 9.3

“This is a great

analogy to

remember.”

—AP Teacher

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