Question

1. Profit maximization using total cost and total revenue curves

Suppose Juanita 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 Juanita'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 Juanita produces.

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

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

Answer 1

TR=P*Q=20*Q

TC is given.

Profit= TR-TC

Find these values at each output level and plot them.

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

MR=$20

MCn= TCn-TCn-1

45 MC;MR- 35 30 25 20 15 -10 Quantity

Juanita's profit is maximized when she produces 6 teddy bears.

Reason- profit =$45, maximum when Q=6.

Marginal cost of last teddy bear= $15 which is LESS than the price.

reason- Price=$20, MC of 5th unit=$15. so P>MC.

Marginal cost of next teddy bear= $20 which is MORE than the price.

reason- Price=$25, MC of 5th unit=$15. so P

Profit maximizing quantity corresponds to the intersect of MARGINAL COST AND MARGINAL REVENUE CURVES.

reason- MC=MR =20 when Q=6

Last condition can also be written as P=MC

reason- Since P=MR=MC=$20.

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Answer 2

Answer 3

That is true except for the first value in the second graph, the curve should start beneath the marginal revenue line as there is a 15 difference from the first number to the second.