2 . Profit maximization using total cost and total revenue curves Suppose Hilary 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 Hilary's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot prot for the first seven shirts that Hilary produces, including zero shirts. Note: Points will snap to the quantities of output as well as level of prot and revenue. 200 O 175 Total Revenue .5 in D A 125 Total Cost Profit 100 n in -i O 01 TOTAL COST AND REVENUE (Dollars) M m 0 1 2 3 4 5 6 7 8 QUANTITY {Shirts} Calculate Hilary's marginal revenue and marginal cost for the rst seven shirts 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. Note: Plot quantity values between the integers. For example, if Hilary's marginal cost of increasing production from one shirt to two shirts is x, then you would plot a point at (1.5, x). Points will snap to the quantities of output as well as the level of cost and revenue. 40 0 35 f Marginal Revenue .: E 30 a El E = 25 . :03, Marginal Cost s z 20 - E LIJ n: 15 Ci 2 4 f2 10 m o o 5 0 o 1 2 3 4 5 6 7 a QUANTITY(Shirls) Hilary's profit is maximized when she produces C] shirts. when she does this, the marginal cost of the last shirt she produces is , which is Y than the price Hilary receives for each shirt she sells. The marginal cost of producing an additional shirt (that is, one more shirt than would maximize her profit) is , which is V than the price Hilary receives for each shirt she sells. Therefore, Hilary's profit- maximizing quantity corresponds to the intersection of the V curves. Because Hilary is a price taker, this last condition can also be written as Y . Continue without saving