Question

3. Profit maximization using total cost and total revenue curves

Suppose Yakov runs a small business that manufactures frying pans. Assume that the market for frying pans is a perfectly competitive market, and the market price is $20 per frying pan.

The following graph shows Yakov's total cost curve.

Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for the first seven frying pans that Yakov produces, including zero frying pans.

Calculate Yakov'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.

Note: Be sure to plot marginal values between the appropriate whole unit values. For instance, plot values at 0.5,1.5, and so on.

Yakov'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 Yakov 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 Yakov receives for each frying pan he sells. Therefore, Yakov's profit-maximizing quantity corresponds to the intersection of the  _______ curves. Because Yakov is a price taker, this last condition can also be written as _______ .

Answer 1

Q	TC	TR	Profit	MC	MR
0	10	0	-10
1	15	20	5	5	20
2	20	40	20	5	20
3	30	60	30	10	20
4	45	80	35	15	20
5	70	100	30	25	20
6	100	120	20	30	20
7	135	140	5	35	20

Total Revenue Total Cost A Profit TOTAL REVENUE, TOTAL COST, AND PROFIT (Dollars) 0 1 7 8 2 3 4 5 6 QUANTITY OF OUTPUT (Frying pans)

Marginal Revenue Marginal Cost PRICE AND COST (Dollars per frying pan) 1 7 8 2 3 4 5 6 QUANTITY OF OUTPUT (Frying pans)

Blanks-

1) 4

2) 15

3) less

4) 25

5) more

6) MC=MR

7) P=MC