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Similarly, the firm’s total variable cost at 1 is as follows TVC = Average variable cost × Quantity = Vertical height OE × Width Oq 1 = The area of rectangle OEBq 1 Now recall that the firm’s profit at q 1s TR – (TVC + TFC); that is, [the area of rectangle OpAq ] – [the area of rectangle OEBq ] – TFC. What happens if the firm 1 1 produces zero output? Since output is zero, TR and TVC are zero as well. Hence, the firm’s profit at zero output is equal to – TFC. But, the area of rectangle OpAq 1 is strictly less than the area of rectangle OEBq . Hence, the firm’s profit at q is 1 1 [(area EBAp)-TFC], which is strictly less than what it obtains by not producing at all. So, the firm will choose not to produce at all, and exit from the Price, costs LRMC market. Case 2: Price must be greater than or equal to AC in the LRAC long run We will show that the statement of E B Case 2 (see above) is true by arguing that a profit-maximising p firm, in the long run, will not A produce at an output level wherein the market price is lower O q1 Output than the AC. Fig. 4.5 Let us turn to Figure 4.5. Price-AC Relationship with Profit Observe that at the output levelq 1 Maximisation (Long Run). The figure is used to the market price p is lower than the (long run) AC. We claim that demonstrate that a profit-maximising firm produces zero output in the long run when the q1cannot be a profit-maximising market price, p, is less than the minimum of its output level. Why? long run average cost (LRAC). If the firm’s output 58 Notice that the firm’s total level i1 q , the firm’s total cost exceeds its revenue y s byanamountequaltotheareaofrectanglepEBA. o i revenue, TR, at q 1s the area of the c o rectangle OpAq (t1e product of d o priceandquantity)whilethefirm’s t e I c total cost, TC , is the area of the i rectangle OEBq (t1e product of M average cost and quantity). Since the area of rectangle OEBq is 1 larger than the area of rectangle OpAq ,thefirmincursalossatthe 1 output level q .1But, in the long runset-up,afirmthatshutsdown production has a profit of zero. Again, the firm chooses to exit in this case. 4.3.4 The Profit Maximisation Problem: Graphical Representation Geometric Representation of Profit Maximisation (Short Run). Given market Using the material in sections 3.1, price p, the output level of a profit-maximising 3.2 and 3.3, let us graphically firm is0q . A0 q , the firm’s profit is equal to the represent a firm’s profit area of rectangle EpAB. Reprint 2026-27