3. Profit maximization using total cost and total revenue curves Suppose Eric runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a perfectly competitive market, and the market price is $20 per teddy bear The following graph shows Eric'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 teddy bears that are produces, including zero teddy bears. 3. Profit maximization using total cost and total revenue curves Suppose Eric runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a perfectly competitive market, and the market price is $20 per teddy bear The following graph shows Eric's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plat profile for the first seven teddy bears that ene produces, including zero teddy bears. 2 200 -- 175 150 Total Revenue 125 Total Cost Profit 100 TOTAL REVENUE, TOTAL COST, AND PROFIT (Dollars) 75 50 25 . -23 1 8 QUANTITY OF OUTPUT (Teddy bears) QUANTITY OF Calculate Eric'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. Note: Be sure to plot marginal values between the appropriate whole unit values. For instance, plot values at 0.5, 1.5, and so on. 40 35 Marginal Revenue 30 -0- 25 Marginal Cost PRICE AND COST (Dollars per teddy bear) 20 15 10 5 0 1 7 QUANTITY OF OUTPUT (Teddy bears) 4 35 30 Marginal Revenue -0- 25 Marginal Cost PRICE AND COST (Dollars per teddy bear) 20 15 10 $ QUANTITY OF OUTPUT (Teddy bears) Eric'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 Eric 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) iss which is than the price Eric receives for each teddy bear he sells. Therefore, Eric's profit-maximizing quantity corresponds to the intersection of the curves. Because Eric is a price taker, this last condition can also be written as