Suppose Lucia 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 $20 per teddy bear. The following graph shows Lucia'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 Lucia produces, including zero teddy bears. 175 150 Total Cost Total Revenue 125 100 Profit 75 -25 -50 3 4 6. 7 8 QUANTITY (Teddy bears) TOTAL COST AND REVENUE (Dollars)
Suppose Lucia 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 $20 per teddy bear. The following graph shows Lucia'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 Lucia produces, including zero teddy bears. 175 150 Total Cost Total Revenue 125 100 Profit 75 -25 -50 3 4 6. 7 8 QUANTITY (Teddy bears) TOTAL COST AND REVENUE (Dollars)
Chapter11: Profit Maximization
Section: Chapter Questions
Problem 11.1P
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Transcribed Image Text:Suppose Lucia 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 $20 per teddy bear.
The following graph shows Lucia'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 Lucia
produces, including zero teddy bears.
(?)
175
150
Total Cost
Total Revenue
125
100
Profit
75
-25
-50
4
7
8
QUANTITY (Teddy bears)
TOTAL COST AND REVENUE (Dollars)
Transcribed Image Text:Calculate Lucia'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.
30
25
Marginal Revenue
20
Marginal Cost
15
1
3
4
6
7
8
QUANTITY (Teddy bears)
Lucia's profit is maximized when she produces
teddy bears. When she does this, the marginal cost of the last teddy bear she produces is
, which is
than the price Lucia 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 $
which is
than the price Lucia receives for each teddy bear
she sells. Therefore, Lucia's profit-maximizing quantity corresponds to the intersection of the
curves.
Because Lucia is a price taker, this last condition can also be written as
COSTS AND REVENUE (Dollars per teddy bear)
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