Question

3. Profit maximization using total cost and total revenue curves Suppose Dina runs a small business that manufactures trying pans. Assume that the market for frying pans is a competitive market, aid the market price is $20 per frying pan. The following graph shows Dina'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 Dina produces, including zero frying pans.

Answer 1

Table 1.1 shows values of MC, price, TR, MR, and profit loss Table 1.1 A. TR MR Profit/Loss Price 20 20 20 20 20 20 20 20 MC 1 QuantityTC 20 35 40 45 20 -15 20 20 20 20 20 20 20 20 40 15 3 10 15 25 30 80 100 120 140 15 25 30 25 15 70 95 125 8 Table 1.2 shows that used formula for table 1.1

Table 1.2 MC Price TR 20 1 Quan TC MR Profit/Loss +A2 D2 +E2-B2 35 40 45 4-B3)/(A4-A3) 20 A4 D4(E4-E3) (A4-A3 E4-B4 5-E4) (A5-A4) +E5-B5 6-B5)(A6-A5) 20 A6 D6E6-E5)(A6-A5) +E6-B6 E7-B7 5-B4) (A5-A4) 20 +A5 D5 70 95 125 7-E6) (A7-A6) 7-B6) (A7-A6) 20 (B8-B7 (A8-A7) 20 +A7 D7 8 6 9-E8)/(A9-A8E9-B9 Graph 1.1 shows about TC, TR, and profit Graph 1.1

200 T 175 150 125 Total Revenue Profit 100 75 50 25 25 QUANTITY (Frying pans) Graph 1.2 shows about MC, and MR. Graph 1.2

40 T 2 35 Marginal Revenue Marginal Cost 15 2 10 0 2 QUANTITY (Frying pans)

Dina's profit is maximized when she produces five frying pans. When she does this, the marginal cost of the last flying pan she produces is S15, which is lower than the price Dina receives for each frving pan she sells. The marginal cost of producing an additional frying pan (that is, one more frying pan than would maximize her profit) is S25, which is higher than the price Dina receives for each frying pan she sells. Therefore, Dina's profit-maximizing quantity corresponds to the intersection of the marginal cost and marginal revenue curves. Because Dina is a price taker, the last condition can also be written as P MOC