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3. Profit maximization using total cost and total revenue curves Suppose Ana runs a small business...

3. Profit maximization using total cost and total revenue curves

Suppose Ana runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is $20 per shirt.

The following graph shows Ana's total cost curve.

Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven (inclusive) that Ana produces.

Calculate Ana's marginal revenue and marginal cost for the first seven shirts she 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.

Ana's profit is maximized when she producesshirts. When she does this, the marginal cost of the last shirt she produces is, which is (less or greater) than the price Ana receives for each shirt she sells. The marginal cost of producing an additional shirt (that is, one more shirt than would maximize her profit) is, which is (Greater or less) than the price Ana receives for each shirt she sells. Therefore, Ana's profit-maximizing quantity corresponds to the intersection of the   curves. Because Ana is a price taker, this last condition can also be written as   .

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Rahul Sunny answered 2 years ago
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