Short-run Profit Maximization II

In the graph, the point labeled q*, where the MR and MC curves intersect, signifies the profit maximization quantity of a chair manufacturer.

But how much profit is made at this quantity?

Examining both the total revenue, which is the product of price and quantity, and the total cost, which is the product of average total cost and quantity, can clarify this.

Total revenue at q*  is found by multiplying the quantity by the price of the product.

Total cost can be found with the help of the Average Total Cost Curve, which is this U-shaped curve. Multiplying the quantity by the average total cost gives the total cost.

Now, profit is the difference between total revenue and total cost, which is represented by this rectangular area. A larger area signifies higher profit.

If the chair manufacturer stops production before q*, it leads to missed profit represented by this area. Producing beyond q*  results in losses, represented by this area.

Understanding this aids manufacturers in finding the ideal production quantity and helps service providers identify the optimal client load for maximum earnings.