For a firm producing a differentiated product, the feasible set includes all possible combinations of price and quantity that can be chosen, given the constraints of market demand. On a standard price-quantity diagram, this set is graphically represented by the area bounded by the demand curve and the coordinate axes.

Google

This price-quantity diagram for Cheerios plots quantity in pounds (0 to 80,000) on the horizontal axis against price per pound ($0 to $10) on the vertical axis. It features a downward-sloping, convex demand curve that runs between the points (0, $7) and (80,000, $1). The diagram also displays several non-intersecting, downward-sloping, convex isoprofit curves. The $60,000 curve is positioned above the demand curve, the $34,000 curve is tangent to it, and the $10,000 curve intersects it at two points. A horizontal line at $2 per pound represents the zero-profit isoprofit curve, which is located below the other curves.

Figure 7.4a: Cheerios Price-Quantity Diagram with Demand and Isoprofit Curves

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

The isoprofit curve for a \$60,000 profit is a downward-sloping, convex line shown on the Cheerios profit diagram. A key characteristic of this curve is that it is positioned entirely above the demand curve, which signifies that this level of profit is not achievable for the firm. This curve is located above the curves for lower profit levels, such as the one for \$34,000, illustrating that higher isoprofit curves represent higher levels of profit.

The $60,000 Isoprofit Curve for Cheerios (Unfeasible Profit)

The isoprofit curve for a \$10,000 profit for Cheerios is a downward-sloping, convex line that passes through the point representing a quantity of 8,000 pounds and a price of \$3.25 per pound. This curve intersects the demand curve at two distinct points, which represent feasible but non-optimal price-quantity combinations. One of these intersection points features a higher price and a lower quantity, while the other has a lower price and a higher quantity.

The $10,000 Isoprofit Curve for Cheerios

After reaching the profit-maximizing point E at a quantity of 15,000 pounds, any further increase in the production of Cheerios causes profits to decline. This trend is illustrated by the downward-sloping segment of the concave profit curve on the profit-quantity diagram, which begins after the curve's peak at $33,450.

Declining Profits for Cheerios Beyond the Optimal Quantity

In the Cheerios price-quantity diagram, the zero-profit isoprofit curve is a horizontal line at a price of \$2 per pound, which equals the unit cost. Profit becomes zero at the break-even point where this line intersects the demand curve. This corresponds to the point on the profit-quantity diagram at 38,000 pounds, where the profit curve crosses the horizontal axis, indicating zero profit.

Zero-Profit Isoprofit Curve and Break-Even Point for Cheerios

This activity involves visualizing how the demand and isoprofit curves from Figure 7.4a would shift under different hypothetical scenarios. To simplify the task, the demand curve can be treated as linear. The objective is to sketch these new curves and explain the consequent effects on the firm's optimal price and overall profit. [3, 13]

Activity: Analyzing How Curve Changes in Figure 7.4a Affect a Firm's Price and Profit

The Feasible Set for a Firm

The maximum profit for Cheerios is $34,000, which is achieved at a production and sales quantity of 14,000 pounds. This profit-maximizing point is represented in two ways: on the price-quantity diagram, it is the point where the demand curve is tangent to the $34,000 isoprofit curve, and on the profit-quantity diagram, it corresponds to the peak of the concave profit function.

Learn Before

Related