Principles of Microeconomics / Unit 7 MIC 0611 worked example, 60 to 90 seconds
Profit, Break-Even or Loss
The idea
For each market price, first apply the marginal rule to get the quantity. Second, compute average total cost at that quantity, total cost over output. Third, compare: price above average total cost gives a profit of the gap times the quantity; price equal gives zero economic profit, the break-even case; price below gives a loss of the gap times the quantity. Report the case and the amount.
In practice
Worked example: at thirty dollars the farm grows eight flats, average total cost is two oh two over eight, about twenty-five twenty-five, and profit is about four seventy-five a flat, thirty-eight dollars in all. At twenty-five dollars it grows seven, average total cost is about twenty-four eighty-six, and profit is about fourteen cents a flat, a dollar: as near break-even as whole flats allow. At twenty-two dollars it grows six, average total cost is twenty-five, and the loss is three a flat, eighteen dollars.
Where people slip
The quantity comes first and the average second; computing average cost at some other output gives the wrong gap. And a small positive number at the break-even price is rounding on a table of whole units, not evidence of real profit.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it