Profit area at price 0A

Profit takes two steps: pick the output, then measure the rectangle.

Step 1, output. A competitive firm takes 0A as its price, which is also its marginal revenue, and it produces where MR = MC. Follow the horizontal line at A until it meets the marginal cost curve. That is point H, so the firm makes the output directly below H.

Step 2, the rectangle. Profit per unit is price minus average total cost at that output. Drop straight down from H to the ATC curve; it meets ATC at K, which sits at height 0B. So profit per unit is A minus B, and the output is the width from the price axis to H.

Economic profit is the rectangle with corners A, B, K and H, which is ABKH.

Each choice

• A. This rectangle uses the output below G, where MC meets ATC at its lowest point, not where MC meets price. Average total cost of B at that narrow width also does not match the output. It stops short of the profit-maximizing quantity.
• B (correct). MC meets the price line at H, and ATC at that output is at height B, so profit per unit is A minus B over that quantity.
• C. This rectangle runs out to I, past the point where MC equals price. Units beyond H cost more to make than the price they sell for, so the firm would not produce them.
• D. This uses the lowest point of ATC, at M, as the cost per unit. That is the break-even output, not the one the firm chooses when price is 0A, and the cost per unit must come from the chosen output.
• E. This rectangle is the total cost of producing at the bottom of the ATC curve: cost per unit times quantity. It is not a profit area at all.