Friday, July 10, 2009

How can we determine the economic profit in the following scenario? The question was: What is Pat’s shutdown point and what is Pat’s...

If I understand your question correctly, you are trying to determine what Pat’s economic profit will be when he produces 2 pizzas.  If this is what you are asking, it is impossible to find the answer using only the information that you have given.  In order to find out what Pat’s economic profit is, we would need to know how much money Pat received for selling the two pizzas.


As you can see in the link below, economic profit equals total revenue minus total cost (this has to include both explicit and implicit costs).  Let us assume that the table you have attached shows Pat’s total costs.  The problem is that we still need to know how much revenue he received.


You have stated that Pat’s economic profit is actually -$10.  That means that his revenue had to be $10 lower than his costs.  The table shows that the cost of producing the two pizzas was $30.  Therefore, his revenue had to be $20, meaning that each pizza sold for $10.   This has to be the amount of revenue he got because 20 minus 30 = -10.


So, the equation that you are supposed to use to find economic profit is total revenue minus total cost.  Therefore, you need to know both total revenue and total cost to find economic profit.  Presumably, the revenue that Pat received is shown elsewhere in your assignment.

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