Question

 3. Profit maximization using total cost and total revenue curves

 Suppose Darnell 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 Darnell'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 Darnell produces.

QUANTITY . TOTAL COST

0	10
1	15
2	20
3	30
4	45
5	70
6	100
7	135

 Calculate Darnell'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.

Darnell'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

First let us complete the following table:

Frying pans	TC	TR	Profit	MR	MC
0.00	10.00	0.00	-10.00
1.00	15.00	20.00	5.00	20.00	5.00
2.00	20.00	40.00	20.00	20.00	5.00
3.00	30.00	60.00	30.00	20.00	10.00
4.00	45.00	80.00	35.00	20.00	15.00
5.00	70.00	100.00	30.00	20.00	25.00
6.00	100.00	120.00	20.00	20.00	30.00
7.00	135.00	140.00	5.00	20.00	35.00

• 
• 
• Profit = TR-TC
• 
• Profit is maximised at 4 units of frying pans
• At this point price = 20 and MC = 15 so MC is lower than the price
• At 5 units, ie, one more than profit maximizing output, the price is still 20 and MC is 25, therefore MC is higher than the price
• As we can't have a fractional unit of frying pans, we can say that the profit is maximized where MR and MC curve intersect in normal circumstances, where fractional units are possible
• Equilibrium of a price take is written as AR=MR=MC=P