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Graphing Exercise:
Short-Run Profit Maximization
A competitive firm is a price-taker, able to sell as little or as much as it desires at the
going market price. In other words, demand for a competitive firm is perfectly elastic at
the going price. Its only choice, then, is how much output, if any, to produce. Throughout,
firms are assumed to maximize profits.
Exploration: With respect to its output choice, what is the rule a competitive firm will
follow to obtain maximum profits?
The graph shows the average- and marginal-cost curves of a typical competitive firm.
Initially, price is $80 and the firm is producing 80 units per week. Its fixed costs are
$2700 per week. To use the graph, click and drag the green triangle on the vertical axis to
change the market price, hence the firm's demand curve. Click and drag the green triangle on
the horizontal axis to change the firm's choice of output. Cost and profit data are shown in
the box at right; clicking on the Show Profit/Loss button will provide a graphical
illustration of the firm's profit or loss, profit in green and losses in red. Clicking the
Reset button will restore all initial values.
At the initial market price of $80 and
output level of 80 units per week, how much profit is the firm earning? Is there any other
output choice that provides a higher
profit?
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