Figure E7.2 is a diagram that illustrates the relationship between isoprofit curves and the profit-maximization strategy for the 'Beautiful Cars' firm.

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The isoprofit curves for the Beautiful Cars firm are visualized on a price-quantity diagram, with car quantity (0-100) on the x-axis and price (\$0-\$45,000) on the y-axis. The diagram shows several isoprofit curves: one for a loss of \$80,000, represented by a horizontal line at a price of \$14,400; a zero-profit curve, which is downward-sloping and convex; and a \$150,000 profit curve, which is also downward-sloping and convex, passing through points G and H. A fourth curve, representing an even higher profit, is shown passing through point K. This point K has the same quantity as point H but is at a higher price, illustrating that higher curve positions correspond to greater profits.

Visualizing the Isoprofit Curves for Beautiful Cars

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

For the Beautiful Cars firm, the zero-economic-profit curve represents all combinations of price and quantity where economic profit is zero. This occurs when the price equals the average cost at a given output level, making this isoprofit curve identical to the firm's average cost curve. Graphically, it is a downward-sloping, convex curve that is positioned above the horizontal isoprofit line representing a loss of \$80,000 at all points.

The Zero-Economic-Profit Curve for Beautiful Cars

On a price-quantity diagram, a firm's total profit is represented by the area of a rectangle, derived from the formula Profit = Q(P - AC). The rectangle's width corresponds to the quantity (Q), which is the horizontal distance from the vertical axis to a specific point like G. Its height is the price minus the average cost (P - AC), represented by the vertical distance between the isoprofit curve passing through point G and the zero-profit isoprofit curve (which is the average cost curve). The total area of this resulting rectangle equals the firm's total profit at that given price and quantity.

Visualizing Total Profit as the Area of a Rectangle (Profit = Q(P - AC))

In a price-quantity diagram for the Beautiful Cars firm, where the quantity of cars (from 0 to 100) is on the horizontal axis and the price (from \$0 to \$45,000) is on the vertical axis, the isoprofit curve for a profit of -\$80,000 is a horizontal line. This line is positioned at a constant price of \$14,400, which is exactly equal to the firm's marginal cost. This specific pricing strategy (P=MC) results in a loss equivalent to the firm's total fixed costs because the revenue from each car sold only covers the variable cost of producing it, leaving no contribution towards fixed costs.

The Flat Isoprofit Curve for Beautiful Cars (P=MC, Profit = -\$80,000)

A specific isoprofit curve for the Beautiful Cars firm represents a profit of \$150,000. This curve includes point G, representing the sale of 11 cars at a price of \$35,309. This point is used as an example to illustrate the properties of the curve, particularly because the price at this point is substantially higher than the firm's marginal cost. The curve, which is downward-sloping and convex, also passes through point H, which involves a higher quantity and a lower price than point G.

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