The diagram below shows the cost and revenue curves of a firm facing a downward sloping
demand curve.
Finding the Profit Maximising Output
50
45
Costs and revenues
40
35
30
25
20
15
10
5
0
0
20
40
60
80
100 120 140 160 180 200 220 240
Output (Q)
1. Label the curves shown in the diagram above
2. Find the profit maximising price and output
3. What is the approximate average total cost of producing the profit maximising output?
4. What is the profit per unit at this output?
5. Calculate the total profit that the business makes at this price and output
Changes in costs and changes in the profit maximizing output
Finding the Profit Maximising Output
50
45
Costs and revenues
40
35
30
25
20
15
10
5
0
0
20
40
60
80
100 120 140 160 180 200 220 240
Output (Q)
In the example above the business has experienced higher marginal and average total costs – find the
new profit maximising output and show the new level of profits
A business that is making losses
Finding the Profit Maximising Output
30
28
26
24
22
Costs and revenues
20
18
16
14
12
10
8
6
4
2
0
0
10
20
30
40
50
60
70
Output (Q)
80
90
100
110
120
Find the profit maximising output level for this business which has costs and revenues as shown in the
diagram
Your notes
Changes in demand and profit maximisation
100
90
Costs and revenues
80
MC
70
60
AC
50
40
30
20
10
MR
AR
0
0
100
200
300
400
500
600
700
800
900 1000 1100 1200
Output (Q)
Changes in demand and profit maximisation
100
90
Costs and revenues
80
MC
70
60
AC
50
40
30
20
10
MR2
MR
AR2
AR
0
0
100
200
300
400
500
600
700
Output (Q)
800
900
1000 1100 1200
FALL IN THE FIXED COSTS OF PRODUCTION
100
90
80
MC
Costs and revenues
70
60
AC1
50
40
AC2
30
20
10
MR
AR
0
0
100
200
300
400
500
600
Output
(Q)700
800
900
1000
1100
1200
In the example above we see the effects of a fall in the fixed costs of production
Your notes
Profits and Revenues - Different Objectives
50
45
Costs and revenues
40
35
30
25
20
15
10
5
0
0
20
40
60
80
100 120 140 160 180 200 220 240
Output (Q)
1. Label the curves shown in the diagram above
2. Calculate the approximate level of profits at the profit maximising level of output
3. Calculate the approximate level of profits if the business seeks to produce an output and sell at
a price that maximises revenue rather than profit
4. Which of the two outputs from questions 2 and 3 above gives the highest level of consumer
surplus?