Question

 3. Profit maximization using total cost and total revenue curves

 Suppose Manuel runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a competitive market, and the market price is $20 per teddy bear.

 The following graph shows Manuel's total cost curve.

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

TOTAL COST	QUANTITY
20	0
35	1
40	2
45	3
55	4
70	5
95	6
125	7

 Calculate Manuel's marginal revenue and marginal cost for the first seven teddy bears 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.

 Manuel's profit is maximized when he produces _______  teddy bears. When he does this, the marginal cost of the last teddy bear he produces is _______  which is _______  than the price Manuel receives for each teddy bear he sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize his profit) is $_______  ,which is _______ than the price Manuel receives for each teddy bear he sells. Therefore, Manuel's profit-maximizing quantity corresponds to the intersection of the _______  curves.

 Because Manuel is a price taker, this last condition can also be written as _______ .

Answer 1

Ans) In competitive firm, market price is equal to marginal revenue. A firm maximises profit where MC = MR. On graph it is a point where marginal cost and marginal revenue curve intersect.

Marginal cost = change in total cost ÷ change in quantity

Firm will produce 5 teddy bears because after this, MC will exceed MR and making teddy bear will bring loss.

Marginal cost roducing an extra teddy bear after 5th teddy bear is $25, which is more than Marginal revenue.

Therefore profit maximising point is where MR and MC curve intersect. Since firms have no control over price, this is profit maximising quantity.

Kindly note that exact intersection point will be known once you plot the graph on system. The graph that I have made is a rough drawing of it.

Here change in profit is marginal profit.

(This is the complete solution)