Question

Suppose Janet 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 Janet'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 Janet produces.

 Calculate Janet's marginal revenue and marginal cost for the first seven frying pans 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.

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

Answer 1

Janet's profit is maximized when she produces 4 frying pans.

Marginal cost of the last frying pan is $25 which is LESS than the price Janet receives.

Marginal cost of producing additional pan is $25 which is GREATER than the price.

Therefore Janet's profit maximizing quantity corresponds to the intersection of the MARGINAL COST AND MARGINAL REVENUE curves.

This condition can also be written as P=MC.