Marginal Principle

Cattle farmer – Likely a perfectly competitive market.

Profit maximization point: AR = MR

• At Q2, The firm is not making maximum profit. Because the firm can still sell more product while having MR > MC for each additional good produced.
• At Q1, The firm is making a profit, but the marginal profit is going down. The firm is making a profit overall, but the profit per unit is going down. MR < MC

Short Run

• At P2, the firm should continue producing
• At P3, the firm should shutdown temporarily

Long run

• In the image above, Firm should Exit the industry at both p2 and p3.