(Solved): 3. Profit maximization using total cost and total revenue curves Suppose Poornima runs a small bus ...

3. Profit maximization using total cost and total revenue curves Suppose Poornima runs a small business that manufactures frying pans. Assume that the market for frying pans is a competitive market, and the market price is $25 per frying pan. The following graph shows Poornima's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for frying pans quantities zero through seven (inclusive) that Poornima produces. 200 175 150 125 L 100 0 1 3 4 5 6 7 8 QUANTITY (Frying pans) Calculate Poornima's marginal revenue and marginal cost for the first seven frying pans 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) 2 Total Cost - T Total Revenue ? A Profit COSTS AND REVENUE (Dollars per frying pan) 40 35 30 25 20 15 10 5 0 1 2 3 A 5 QUANTITY (Frying pans) 9 7 8 Marginal Revenue O Marginal Cost ? Poornima's profit is maximized when she produces $ which is frying pans. When she does this, the marginal cost of the last frying pan she produces is than the price Poornima receives for each frying pan she sells. The marginal cost of producing an additional frying which is than the price Poornima receives for each frying I I pan (that is, one more frying pan than would maximize her profit) is $ pan she sells. Therefore, Poornima's profit-maximizing quantity corresponds to the intersection of the curves. Because Poornima is a price taker, this last condition can also be written as