Question

Suppose that the firm has determined its profits-maximizing level of output (q*) in the short-run. When the firm produced and sold q*, profits turned out to be negative.
a) Is that possible?
b) What happens to profits when the firm produces more than q*?

c) What happens to profits when the firm produces less than q*?

Answer 1

(a) Yes, it is possible. A firm maximizes profit (or minimizes losses) at that output level where Marginal revenue (MR) equals Marginal cost (MC). At the point of intersection of MR and MC, if Average total cost (ATC) is higher than price, there will be a loss.

(b) When output is more than q*, MC is higher than MR and firm incurs a marginal loss, and negative profits will increase, i.e. loss will increase.

(c) When output is less than q*, MR is higher than MC and firm incurs a marginal profit, and negative profits will decrease, i.e. loss will decrease.