Assume that the average variable cost of the firm is given by AVC (q) = 3 + q. Assume that the firm's fixed costs are known to be $3. Will the firm be earning positive, negative, or zero profit in the short run?
Profit is equivalent to total revenue minus total cost. Total cost is equivalent to total variable cost plus fixed cost. Total variable cost is equivalent to (AVC)(q). Thus, at q = 3,
TVC = (3 + 3)(3) = $18.
Fixed cost is equivalent to $3.
Thus, total cost equals TVC plus TFC, or
TC = 18 + 3 = $21.
Total revenue is price time's quantity:
TR = ($9)(3) = $27.
Profit is net revenue minus total cost:
∏ = $27 - $21 = $6.
Thus, the firm is earning positive economic profits.
More easily, you might remember that profit equals surplus minus fixed cost. As we found that surplus was $9 in question 6, profit equals 9-3 or $6.