Question

3. Profit maximization using total cost and total revenue curves

Suppose Edison 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 Edison'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 Edison produces.

Calculate Edison'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.

Edison's profit is maximized when he produces frying pans. When he does this, the marginal cost of the last frying pan he produces is 5 , which is than the price Edison 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 Edison receives for each frying pan he sells. Therefore, Edison's profit-maximizing quantity corresponds to the intersection of the curves. Because Edison is a price taker, this last condition can also be written as.

Answer 1

150 -1-40 LTC,TR,profit -130 +1-10 100 -90- 80 70 -60- 50 -40 30 20 10 2/3 4 5 --10- Quantity -20

45 MC;MR- 35 30 25 20 15 -10 Quantity
Total revenue= Price *Quantity= 20*Quantity

Profit= Total revenue- Total cost

MRn=TRn-TRn-1

MCn=TCn-TCn-1

Edison's profit is maximized when he produces 6 frying pans and the marginal cost of last frying pan is $15 which is LESS THAN the price. The marginal cost of additional frying pans is $25 which is GREATER Than the price.

Therefore Edison's profit maximization quantity corresponds to the intersection of MARGINAL REVENUE AND MARGINAL COST CURVES.

because Edison is a price taker it can also be written as P=MC.