3. Profit maximization using total cost and total revenue curves Suppose Rian operates a handicraft pop-up retail shop that sells cardigans. Assume a perfectly competitive market structure for cardigans with a market price equal to $25 per cardigan. The following graph shows Rian's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for cardigans for quantities zero through seven (including zero and seven) that Rian produces. 200 175 150 Total Cost 125 100 75 50 25 0 A + A -25 0 2 A 5 6 7 8 3 4 QUANTITY (Cardigans) Total Revenue Profit Calculate Rian's marginal revenue and marginal cost for the first seven cardigans they produce, 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. 35 15 5 0 D 1 2 3 4 5 7 8 QUANTITY (Cardigans) Marginal Revenue -0- Marginal Cost Rian's profit is maximized when they produce a total of , an amount cardigans. At this quantity, the marginal cost of the final cardigan they produce is , an amount than the price received for each cardigan they sell. At this point, the marginal cost of producing one more cardigan (the first cardigan beyond the profit maximizing quantity) is $ than the price received for each cardigan they sell. Therefore, Rian's profit-maximizing quantity occurs at the point of Intersection between the curves. Because Rian is a price taker, the previous condition is equivalent to
3. Profit maximization using total cost and total revenue curves Suppose Rian operates a handicraft pop-up retail shop that sells cardigans. Assume a perfectly competitive market structure for cardigans with a market price equal to $25 per cardigan. The following graph shows Rian's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for cardigans for quantities zero through seven (including zero and seven) that Rian produces. 200 175 150 Total Cost 125 100 75 50 25 0 A + A -25 0 2 A 5 6 7 8 3 4 QUANTITY (Cardigans) Total Revenue Profit Calculate Rian's marginal revenue and marginal cost for the first seven cardigans they produce, 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. 35 15 5 0 D 1 2 3 4 5 7 8 QUANTITY (Cardigans) Marginal Revenue -0- Marginal Cost Rian's profit is maximized when they produce a total of , an amount cardigans. At this quantity, the marginal cost of the final cardigan they produce is , an amount than the price received for each cardigan they sell. At this point, the marginal cost of producing one more cardigan (the first cardigan beyond the profit maximizing quantity) is $ than the price received for each cardigan they sell. Therefore, Rian's profit-maximizing quantity occurs at the point of Intersection between the curves. Because Rian is a price taker, the previous condition is equivalent to
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:3. Profit maximization using total cost and total revenue curves
Suppose Rian operates a handicraft pop-up retail shop that sells cardigans. Assume a perfectly competitive market structure for cardigans with a
market price equal to $25 per cardigan.
The following graph shows Rian's total cost curve.
Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for cardigans for quantities zero through
seven (including zero and seven) that Rian produces.
200
175
150
Total Cost
125
100
75
50
25
0 A
+
A
-25
0
2
A
5
6
7
8
3
4
QUANTITY (Cardigans)
Total Revenue
Profit
Calculate Rian's marginal revenue and marginal cost for the first seven cardigans they produce, 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.
35
15
5
0
D
1
2
3
4
5
7
8
QUANTITY (Cardigans)
Marginal Revenue
-0-
Marginal Cost
Rian's profit is maximized when they produce a total of
, an amount
cardigans. At this quantity, the marginal cost of the final cardigan they produce is
, an amount
than the price received for each cardigan they sell. At this point, the marginal cost of producing one more
cardigan (the first cardigan beyond the profit maximizing quantity) is $
than the price received for each cardigan
they sell. Therefore, Rian's profit-maximizing quantity occurs at the point of Intersection between the
curves. Because Rian is a price taker, the previous condition is equivalent to
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