2 . Profit maximization using total cost and total revenue curves Suppose Sam runs a small business that manufactures shirts. Assume that the market for shirts is a perfectly competitive market, and the market price is $20 per shirt. The following graph shows Sam'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 shirts that Sam produces, including zero shirts. Note: Points will snap to the quantities of output as well as level of profit and revenue. 200 O 175 Total Revenue 150 Total Cost A 125 Profit 100 TOTAL COST AND REVENUE (Dollars) 75 50 25 O .25 2 3 7 co QUANTITY (Shirts)Calculate Sam's marginal revenue and marginal cost for the first seven shirts 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. Note: Plot quantity values between the integers. For example, if Sam's marginal cost of increasing production from one shirt to two shirts is 2. then you would plot a point at (1.5, 3.). Points will snap to the quantities of output as well as the level of cost and revenue. 4o -.- 35 E Marginal Revenue 1: 3 so 3 -I- E a 25 Marginal Cost 9 % 2 2o LL| :7:- LL| 91' 15 a z e: '62 10 U) o O 5 o D 1 2 3 1 5 o r 3 QUANTITY {Shins} Sam's prot is maximized when he produces shirts. when he does this. the marginal cost of the last shirt he produces is $ . which is v than the price Sam receives For each shirt he sells. The marginal cost of producing an additional shirt (that is, one more shirt than would maximize his prot) is ,. which is V than the price Sam receives for each shirt he sells. Therefore, Sam's protmaximizing quantity corresponds to the intersection of the V curves. Because Sam is a price taker, this last condition can also be written as v