3. Profit maximization using total cost and total revenue curvesSuppose Latasha 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 Latasha'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 Latasha produces. 200175Total Revenue150Total Cost125Profit100755025-251245678QUANTITY (Teddy bears)Calculate Latasha's marginal revenue and marginal cost for the first seven teddy bears she produces, and plot them on the following graph. Use theblue points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity.TOTAL COST AND REVENUE (Dollars) 4035Marginal Revenue3025Marginal Cost151012347QUANTITY (Teddy bears)Latasha's profit is maximized when she produces6 teddy bears. When she does this, the marginal cost of the last teddy bear she produces is$15 , which islessthan the price Latasha receives for each teddy bear she sells. The marginal cost of producing an additional teddybear (that is, one more teddy bear than would maximize her profit) is$25which is greaterthan the price Latasha receives for each teddybear she sells. Therefore, Latasha's profit-maximizing quantity corresponds to the intersection of themarginal cost and marginal revenuecurves. Because Latasha is a price taker, this last condition can also be written as P = MCCOSTS AND REVENUE (Dollars per teddy bear)20

Profit maximizing quantity is determined where MR=MC or the profit is maximum. For the price given:…

Answered: Suppose Latasha runs a small business…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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3. Profit maximization using total cost and total revenue curves

Suppose Latasha 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 Latasha'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 Latasha produces.

200
175
Total Revenue
150
Total Cost
125
Profit
100
75
50
25
-25
1
2
4
5
6
7
8
QUANTITY (Teddy bears)
Calculate Latasha'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.
TOTAL COST AND REVENUE (Dollars)

40
35
Marginal Revenue
30
25
Marginal Cost
15
10
1
2
3
4
7
QUANTITY (Teddy bears)
Latasha's profit is maximized when she produces
6 teddy bears. When she does this, the marginal cost of the last teddy bear she produces is
$15 , which is
less
than the price Latasha 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
$25
which is greater
than the price Latasha receives for each teddy
bear she sells. Therefore, Latasha's profit-maximizing quantity corresponds to the intersection of the
marginal cost and marginal revenue
curves. Because Latasha is a price taker, this last condition can also be written as P = MC
COSTS AND REVENUE (Dollars per teddy bear)
20

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