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

Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 121

they were fine. Whenever they ignored these cautionary words and left the yellow brick

road, bad things happened—the scariest being the arrival of the flying monkeys. The flying

monkeys tore the Scarecrow limb from limb and set the Scarecrow’s straw innards on fire.

Very bad things happen when you leave the yellow brick road.

When you find the profit-maximizing level of production, qe, you are locating the yellow

brick road for this firm. Neverleave this level of output or bad things happen. Finding qeis

the first step in calculating profit with a “profit rectangle.” The area of the shaded rectangle

is 5 bushels wide, multiplied by 40 cents high. In our case, the price $11 in Figure 9.3 is

above the average total cost $10.60, so we have positive economic profits of $2. This does

not always occur in the short run. Another look at our per unit equation tells us:

Short-Run Losses

While firms would love to maintain the above scenario where P >ATC and positive eco-

nomic profits are made, it might not always turn out that way. Due to a failure of the Bugs

Bunny diet fad, the market for carrots suffers a dramatic decrease in demand. Plummeting

demand decreases the market price to $6.50 per bushel, and firms must readjust their

profit-maximizing output decision.

At the much lower price of $6.50, the firm now finds that MR =MC at an output of

three bushels per day. Not surprisingly, the opportunity for positive economic profit has been

eliminated. The profit-maximizing, or loss-minimizing, output of three bushels provides the

best possible scenario for the firm; but that scenario involves economic losses of $14.50. The

rectangle can still be seen in Figure 9.4, where average total cost is $11.33 per bushel.

Table 9.4

DAILY BUSHELS TOTAL TOTAL MARGINAL MARGINAL

OF CARROTS PRICE REVENUE COST PROFIT REVENUE COST

(Q)(P) (TR) (TC) (P) (MR) (MC)

0 $6.50 $0 $16 -$16

l $6.50 $6.50 $22 -$15.50 $6.50 $6

2 $6.50 $13 $27.50 -$14.50 $6.50 $5.50

3 $6.50 $19.50 $34 -$14.50 $6.50 $6.50

4 $6.50 $26 $42 -$16 $6.50 $8

5 $6.50 $32.50 $53 -$20.50 $6.50 $11

6 $6.50 $39 $65 -$26 $6.50 $12

• Many AP students lose points because they incorrectly locate and label profit. When you
  are finding the profit/loss rectangle, it is important to remember the following.


• Find qewhere P=MR =MC. Once you have found qe, never leave it.


• Find ATC vertically at qe. If you move downward, P>0. If you move upward, P<0.


• Move horizontally from ATC to the yaxis to complete the rectangle, and clearly label
  it as positive or negative.

•If P>ATC, P>0.

•If P<ATC, P<0.

•If P=ATC, P=0.

TIP

TIP