Profit maximization in the cost-curve diagram
Suppose that the market for dress shirts is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.
Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point.
The Correct Answer and Explanation is:
To answer your question correctly, I would need to see the cost-curve diagram you’re referring to, since you mentioned a graph with the firm’s daily cost curves. In these types of economics problems, the cost-curve diagram typically includes the following:
- Marginal Cost (MC) curve
- Average Total Cost (ATC) curve
- Average Variable Cost (AVC) curve
- A horizontal line showing Market Price (P) (since it’s a perfectly competitive market)
However, I can guide you through how profit maximization is determined in general using such a cost-curve diagram, and once you upload the image, I can give the exact rectangle and coordinates.
General Explanation (300+ words)
In a perfectly competitive market, each firm is a price taker—it accepts the market price as given because individual firms are too small to affect the market price. The goal of the firm is to maximize profit, which is calculated as:
Profit = Total Revenue – Total Cost
= (Price × Quantity) – (ATC × Quantity)
= (Price – ATC) × Quantity
Graphically, this profit is represented as a rectangle:
- Height = difference between Price (P) and Average Total Cost (ATC) at the profit-maximizing quantity
- Width = Quantity produced
The profit-maximizing output occurs where:
Marginal Cost (MC) = Market Price (P)
This is because producing up to this point ensures that the firm is gaining more revenue from each additional unit than it costs to produce it (as long as P > MC). Once MC exceeds P, producing more would reduce profit.
On the graph:
- Find the point where MC = P (this gives the optimal quantity)
- At this quantity, determine the corresponding ATC
- Then compute (P – ATC) × Quantity to get the area of the profit rectangle
If P > ATC, the firm earns a positive economic profit
If P = ATC, the firm earns zero economic profit (break-even)
If P < ATC, the firm incurs a loss
✅ What I Need from You:
To provide the correct answer and rectangle placement, please upload the graph you mentioned. Once I can see the cost curves and price line, I will place the profit rectangle and give the coordinates of its endpoints with a clear explanat