In: Economics
3. Profit maximization using total cost and total revenue curves
Suppose Raphael runs a small business that manufactures frying pans. Assume that the market for frying pans is a competitive market, and the
market price is $20 per frying pan.
The following graph shows Raphael's total cost curve.
Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for frying pans quantities zero through seven (inclusive) that Raphael produces.
Calculate Raphael's marginal revenue and marginal cost for the first seven frying pans he produces, and plot them on the following graph. Use the blue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity.
Raphael's profit is maximized when he produces _______ frying pans. When he does this, the marginal cost of the last frying pan he produces is _______ which is _______ than the price Raphael receives for each frying pan he sells. The marginal cost of producing an additional frying pan
(that is, one more frying pan than would maximize his profit) is _______ .which is _______ than the price Raphael receives for each frying pan
he sells. Therefore, Raphael's profit-maximizing quantity corresponds to the intersection of the ______________ curves.
Because Raphael is a price taker, this last condition can also be written as _______ .
Q | TC | TR | Profit | MC | MR |
0 | 15 | 0 | -15 | ||
1 | 30 | 20 | -10 | 15 | 20 |
2 | 40 | 40 | 0 | 10 | 20 |
3 | 45 | 60 | 15 | 5 | 20 |
4 | 50 | 80 | 30 | 5 | 20 |
5 | 60 | 100 | 40 | 10 | 20 |
6 | 75 | 120 | 45 | 15 | 20 |
7 | 100 | 140 | 40 | 25 | 20 |
Blanks-
1) 6
2) 15
3) less
4) 25
5) more
6) MC=MR
7) P=MC