Homework (Ch 14) Attempts Keep the Highest / 3 3. Profit maximization using total cost and total revenue curves Suppose Sean 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 Sean'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 Sean produces. (? 200 178 Total Revenue 150 Total Cost 125 Profit 100 TOTAL COST AND REVENUE (Dollars) 25 25 QUANTITY ( Teddy bears) Calculate Sean'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 at each quantity. 40 35 Marginal Revenue 30 -0 25 Marginal Cost COSTS AND REVENUE (Dollars perteddy bear) 20 10 QUANTITY (Teddy bears) Sean'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 Sean 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 Sean receives for each teddy bear he sells. Therefore, Sean's profit-maximizing quantity corresponds to the intersection of the curves. Because Sean is a price taken, this last condition can also be written as Grade It Now Save & Continue Continue without saving