Economic Profit Maximization Overview

Economic Profit Maximization

• Firms aiming to maximize total economic profit should utilize the second method to determine the optimal quantity to produce and sell and the corresponding price to charge.
• The text uses a table (Table 3) to illustrate these methods and demonstrates that both yield the same solution.
• Table 3 includes columns for Quantity Demanded, Price, Average Total Cost (ATC), Total Revenue (TR), Total Cost (TC), Total Economic Profit, Marginal Revenue (MR), and Marginal Cost (MC).
• Output levels between 20 and 50 units result in an economic profit, with 30 and 40 units yielding the maximum total economic profit of $40.
• The second method involves plotting the market demand curve, MR curve, MC curve, and ATC curve.
• Intersection points A and B on the ATC and market demand curves indicate quantities demanded and produced of approximately 17 and 50 units, respectively.
• Within this output range, total economic profit is positive, outside, it's negative.
• At 17 units, the monopolist breaks even as the maximum price consumers are willing to pay equals ATC.
• With an additional unit produced, TR increases by MR = 6.2, while total cost increases by MC = 4.2, resulting in an economic profit increase of 2.
• The monopolist will continue to increase output and lower the price as long as MR > MC, leading to a rising economic profit until MR = MC.
• This occurs at point C, with an output of approximately 35 units, maximizing total economic profit.
• Output increases beyond 35 units lead to MR dropping below MC, resulting in a negative additional economic profit and a decrease in total economic profit.

Socially Optimal Output

• The text discusses the socially optimal output level (10 units) and its relationship to total social benefit and total long-run cost.
• The total social benefit of producing 10 units is equal to the area of trapezoid HFKO, which is 70,significantlygreaterthanthelong−runtotalcostof70, significantly greater than the long-run total cost of 70,significantlygreaterthanthelong−runtotalcostof30.
• Achieving this socially optimal output using self-interest requires allowing the monopolist to discriminate among demanders.

Price Discrimination

• By charging different prices for different units sold, the monopolist can produce the socially optimal output (10 units) by charging a higher price for the first 6 units and a lower price for units 7 to 10.
• This price discrimination leverages the willingness to pay of different demanders, allowing the monopolist to cover costs and produce the socially optimal amount.
• For the first 6 units, the monopolist charges 6,leadingtoaneconomicprofitof6, leading to an economic profit of 6,leadingtoaneconomicprofitof12.
• For units 7 to 10, the monopolist charges 3,resultinginalossof3, resulting in a loss of 3,resultinginalossof4.
• Overall, the monopolist's total economic profit is 8(8 (8(12 profit – $4 loss), demonstrating how price discrimination can lead to socially efficient outcomes.

Application to Rural Doctors

• The text uses the concept of price discrimination to explain the case of doctors in rural areas.
• By charging different prices to different patients based on their willingness to pay, doctors in rural areas can cover their costs and continue providing healthcare services, potentially contributing to social efficiency.