Jim Whitney

Economics 102

Firm profit geometry  

Step 1: Find Q* where MR=MC (on the upward-sloping portion of the MC curve)  Step 2: Label the 3 boxes determined by where Q* crosses P, ATC, and AVC.  Step 3: Indicate below which boxes correspond to TR, TC, TVC, TFC, and P.
TR =  TC =  TVC =  TFC =  P =	TR =  TC =  TVC =  TFC =  P =	TR = C  TC = ABC  TVC = BC  TFC = A  P = TR-TC = C-ABC =  -AB
Question 1: Is P > or = 0 if the firm operates?
		No: P = -AB
Question 2: Is TR > or = TVC? (skip if P > or = 0)
		No: TR (=C) < TVC (=BC)
Question 3: What should the firm do in the long run (LR) and short run (SR)?
		LR: Consider exit from the industry     SR: Shut down

Key formulas to see where each value shows up in the firm diagram:
    TR = P·Q
    TC = ATC·Q (since ATC = TC/Q)
    TVC = AVC·Q
    TFC = AFC·Q = (ATC-AVC)·Q
    P = (P - ATC)·Q (since P = TR - TC = P·Q - ATC·Q)