# of Total Output Marginal Marginal Rev Wage

employees Product Product (MFC)

0 0 ---- ---- -----
E. TR=PxQ TVC= 5x$11
1 14 14 42 $11
TR=$3x46 TVC= $55
2 26 12 36 $11 TR= $138 TFC= $10
3 35 9 27 $11
4 42 7 21 $11 $138
5 46 4 12 $11 - $65
6 48 2 6 $11 $73 (Economic Profit)
 Profit Maximization
3.5
Firms’ Short-Run Decision to Produce and
Long-Run Decision to Enter or Exit a Market
3.6
 Profit Maximization
• Firms attempt to maximize profits by comparing
marginal costs and marginal benefits.
• Firms maximize profits by setting quantity where
marginal revenue equals marginal cost.
• In a perfectly competitive market, marginal revenue
equals price and average revenue. (Price takers)
Quantity Marginal Marginal
Revenue Cost
1 $20 $8
2 $20 $4
3 $20 $8
4 $20 $13
5 $20 $20
6 $20 $35
Quantity Fixed Variable Total Cost Marginal Marginal Profit
Cost Cost Cost Revenue
0 $30 ----- $30 ------ ------
1 $30 $15 $45 $15 $25 -$20
2 $30 $22 $52 $7 $25 -$2
3 $30 $32 $62 $10 $25 $13
4 $30 $45 $75 $13 $25 $25
5 $30 $63 $93 $18 $25 $32
6 $30 $85 $115 $22 $25 $35
7 $30 $120 $150 $35 $25 $25

If this firm decides to set quantity where MC=MR, they will

produce 6 units.
 Short-Run vs. Long-Run Decisions
• In the short-run, firms will operate as long as the price is greater
than AVC or their total revenue is greater than total variable cost
• Firms will shut down if price is less than AVC (if a firm can’t pay
their workers they can’t produce anything)
• Firms will still operate in the short-run if they are at a loss as long
as price > AVC or their loss is less than their fixed cost. But they
will shut down in the long-run if they continue at a loss
• In the long-run, firms enter a market if there are profit-making
opportunities. They will exit a market when they anticipate
economic losses.
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