Suppose Megan runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is $20 per shirt. The following graph shows Megan's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven (inclusive) that Megan produces. TAND REVENUE (Dollars) 200 175 150 125 100 75 0 -25 0 1 2 3 4 5 QUANTITY (Shirts) 6 Total Cost ☐ 8 O Total Revenue A Profit ?
Suppose Megan runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is $20 per shirt. The following graph shows Megan's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven (inclusive) that Megan produces. TAND REVENUE (Dollars) 200 175 150 125 100 75 0 -25 0 1 2 3 4 5 QUANTITY (Shirts) 6 Total Cost ☐ 8 O Total Revenue A Profit ?
Principles of Economics 2e
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ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter8: Perfect Competition
Section: Chapter Questions
Problem 39P: The AAA Aquarium Co. sells aquariums for 20 each. Fixed costs of production are 20. The total...
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![3. Profit maximization using total cost and total revenue curves
Suppose Megan runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is
$20 per shirt.
The following graph shows Megan's total cost curve.
Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven
(inclusive) that Megan produces.
REVENUE (Dollars)
TOTAL COSTA
200
175
150
0
2
QUANTITY (Shirts)
☐
6
Total Cost
O
Total Revenue
A
Profit
(?)
Rectangular Snip
Calculate Megan's marginal revenue and marginal cost for the first seven shirts 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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fae2d9684-12b8-4882-8709-1c12636b95b3%2Faeaca5e8-6f0a-44eb-a048-77b2fde79373%2Fqhzpfx_processed.png&w=3840&q=75)
Transcribed Image Text:3. Profit maximization using total cost and total revenue curves
Suppose Megan runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is
$20 per shirt.
The following graph shows Megan's total cost curve.
Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven
(inclusive) that Megan produces.
REVENUE (Dollars)
TOTAL COSTA
200
175
150
0
2
QUANTITY (Shirts)
☐
6
Total Cost
O
Total Revenue
A
Profit
(?)
Rectangular Snip
Calculate Megan's marginal revenue and marginal cost for the first seven shirts 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.
![COSTS AND REVENUE (Dollars per shirt)
40
35
0
0
1
2
3
QUANTITY (Shirts)
4
6
7
8
Marginal Revenue
O
Marginal Cost
Window Snip
Megan's profit is maximized when she produces
5 shirts. When she does this, the marginal cost of the last shirt she produces is $15, which
is less
than the price Megan receives for each shirt she sells. The marginal cost of producing an additional shirt (that is, one more shirt than
would maximize her profit) is $25, which is greater than the price Megan receives for each shirt she sells. Therefore, Megan's profit-
maximizing quantity corresponds to the intersection of the marginal cost and marginal revenue curves. Because Megan is a price taker, this
last condition can also be written as P = MC](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fae2d9684-12b8-4882-8709-1c12636b95b3%2Faeaca5e8-6f0a-44eb-a048-77b2fde79373%2Frfi60u4_processed.png&w=3840&q=75)
Transcribed Image Text:COSTS AND REVENUE (Dollars per shirt)
40
35
0
0
1
2
3
QUANTITY (Shirts)
4
6
7
8
Marginal Revenue
O
Marginal Cost
Window Snip
Megan's profit is maximized when she produces
5 shirts. When she does this, the marginal cost of the last shirt she produces is $15, which
is less
than the price Megan receives for each shirt she sells. The marginal cost of producing an additional shirt (that is, one more shirt than
would maximize her profit) is $25, which is greater than the price Megan receives for each shirt she sells. Therefore, Megan's profit-
maximizing quantity corresponds to the intersection of the marginal cost and marginal revenue curves. Because Megan is a price taker, this
last condition can also be written as P = MC
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