TOTAL COST AND REVENUE (Dollars) Suppose Lorenzo runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a price-taker market, and the market price is $10 per teddy bear. The following graph shows Lorenzo'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 teddy bears that Lorenzo produces, including zero teddy bears. Total Cost 100 75 1 2 6 QUANTITY (Teddy bears) ÷ Total Revenue Profit Calculate Lorenzo's marginal revenue and marginal cost for the first seven teddy bears he 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. ? COSTS AND REVENUE (Dollars per teddy bear) 15 1 2 4 6 7 QUANTITY (Teddy bears) Marginal Revenue -0- Marginal Cost Lorenzo's profit is maximized when he produces $ teddy bears. When he does this, the marginal cost of the last teddy bear he produces is , which is than the price Lorenzo receives for each teddy bear he sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize his profit) is $ , which is than the price Lorenzo receives for each teddy bear he sells. Therefore, Lorenzo's profit-maximizing quantity corresponds to the intersection of the curves. Because Lorenzo is a price taker, this last condition can also be written as
TOTAL COST AND REVENUE (Dollars) Suppose Lorenzo runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a price-taker market, and the market price is $10 per teddy bear. The following graph shows Lorenzo'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 teddy bears that Lorenzo produces, including zero teddy bears. Total Cost 100 75 1 2 6 QUANTITY (Teddy bears) ÷ Total Revenue Profit Calculate Lorenzo's marginal revenue and marginal cost for the first seven teddy bears he 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. ? COSTS AND REVENUE (Dollars per teddy bear) 15 1 2 4 6 7 QUANTITY (Teddy bears) Marginal Revenue -0- Marginal Cost Lorenzo's profit is maximized when he produces $ teddy bears. When he does this, the marginal cost of the last teddy bear he produces is , which is than the price Lorenzo receives for each teddy bear he sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize his profit) is $ , which is than the price Lorenzo receives for each teddy bear he sells. Therefore, Lorenzo's profit-maximizing quantity corresponds to the intersection of the curves. Because Lorenzo is a price taker, this last condition can also be written as
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:TOTAL COST AND REVENUE (Dollars)
-25
Suppose Lorenzo runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a price-taker market, and the
market price is $10 per teddy bear.
The following graph shows Lorenzo'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 teddy bears that
Lorenzo produces, including zero teddy bears.
125
Total Cost
100
Total Revenue
75
-50
1
2
5
6
QUANTITY (Teddy bears)
Profit
Calculate Lorenzo's marginal revenue and marginal cost for the first seven teddy bears he 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.
?
COSTS AND REVENUE (Dollars per teddy bear)
2
3
5
QUANTITY (Teddy bears)
Marginal Revenue
Marginal Cost
Lorenzo's profit is maximized when he produces
teddy bears. When he does this, the marginal cost of the last teddy bear he produces is
, which is
than the price Lorenzo receives for each teddy bear he sells. The marginal cost of producing an additional teddy
bear (that is, one more teddy bear than would maximize his profit) is $ , which is
than the price Lorenzo receives for each teddy
bear he sells. Therefore, Lorenzo's profit-maximizing quantity corresponds to the intersection of the
curves. Because Lorenzo is a price taker, this last condition can also be written as
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