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Profit maximization using total cost and total revenue curves Suppose Dmitri runs a small business that manufactures frying pans. Assume that the market for frying pans is a competitive market, and the market price is $20 per frying pan. The following graph shows Dmitri'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 frying pans that Dmitri produces, including zero frying pans. Total Revenue Profit 0 1 2 3 4 5 6 7 8 200 175 150 125 100 75 50 25 0 -25 TOTAL COST AND REVENUE (Dollars) QUANTITY (Frying pans) Total Cost Calculate Dmitri's marginal revenue and marginal cost for the first seven frying pans 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. Marginal Revenue Marginal Cost 0 1 2 3 4 5 6 7 8 40 35 30 25 20 15 10 5 0 COSTS AND REVENUE (Dollars per frying pan) QUANTITY (Frying pans) 8, 35 Dmitri's profit is maximized when he produces frying pans. When he does this, the marginal cost of the last frying pan he produces is $ , which is than the price Dmitri receives for each frying pan he sells. The marginal cost of producing an additional frying pan (that is, one more frying pan than would maximize his profit) is $ , which is than the price Dmitri receives for each frying pan he sells. Therefore, Dmitri's profit-maximizing quantity corresponds to the intersection of the curves. Because Dmitri is a price taker, this last condition can also be written as . Grade It Now Save & Continue
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