3. Profit maximization using total cost and total revenue curves Suppose Iyana operates a handicraft pop-up retail shop that sells phone cases. Assume a perfectly competitive market structure for phone cases with a market price equal to $20 per phone case The following graph shows Iyana's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for phone cases for quantities zero through seven (including zero and seven) that Ilyana produces. 200 O 175 Total Revenue 50 Total Cost 125 Profit 100 TOTAL COST AND REVENUE (Dollars) 75 50 25 0 25 O 2 3 4 5 6 7 8 QUANTITY (Phone cases) Calculate Iyana's marginal revenue and marginal cost for the first seven phone cases they produce, 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.KW 09 40 0 35 Marginal Revenue 30 El 25 Marginal Cost 20 15 COSTS AND REVENUE (Dollars per phone case) 0 . . . . . . I . O 1 2 3 4 5 6 7 8 QUANTITY (Phone cases) Iyana's profit is maximized when they produce a total of phone cases. At this quantity, the marginal cost of the final phone case they produce is C] , an amount V than the price received for each phone case they sell. At this point, the marginal cost of producing one more phone case (the first phone case beyond the profit maximizing quantity) is , an amount v than the price received for each phone case they sell. Therefore, Iyana's profit-maximizing quantity occurs at the point of intersection between the V curves. Because Iyana is a price taker, the previous condition is equivalent to V 6. Deriving the short-run supply curve The following graph plots the marginal cost (MC) curve, average total cost (ATC) curve, and average variable cost (AVC) curve for a firm operating in the competitive market for snapback hats. (? 80 12 64 56 48 COSTS (Dollars) 40 ATC 32 24 16 AVC MC 8 16 24 32 40 48 56 64 72 80 QUANTITY (Thousands of snapbacks)For every price level given in the following table, use the graph to determine the prot-maximizing quantity of snapbacks for the rm. Further, select whether the rm will choose to produce, shut down, or be indifferent between the two in the short run. (Assume that when price exactly equals average variable cost, the rm is indifferent between producing zero snapbacks and the prot-maximizing quantity of snapbacks.) Lastly, determine whether the rm will earn a prot, incur a loss, or break even at each price. Price Quantity (Dollars per snapback) (Snapbacks) Produce or Shut Down? Profit or Loss? 4 v v v 8 V V v 12 Y Y Y 36 V v v 48 V V Y 60 v v v On the following graph, use the orange points (square symbol) to plot points along the portion of the rm '5 short-run supply curve that corresponds to prices where there is positive output. (Note: For the graphing tool to grade correctly, you must plot the points in order from left to right, starting with the point closest to the origin. You are given more points to plot than you need.) 30 El 72 64 Firm's Short-Run Supply 56 48 40 32 24 PRICE (Dollars per snapback) 16 0 l l l l l l l l l | O 8 16 24 32 40 4B 56 64 72 80 QUANTITY (Thousands of snapbacks) Suppose there are 9 firms in this industry, each of which has the cost curves previously shown. On the following graph, use the orange points (square symbol) to plot points along the portion of the industry's shortrun supply curve that corresponds to prices where there is positive output. (Note: For the graphing tool to grade correctly, you must plot these points in order from left to right, starting with the point closest to the origin. You are given more points to plot than you need.) Next, place the black point (plus symbol) on the graph to indicate the shortrun equilibrium price and quantity in this market. Note: Dashed drop lines will automatically extend to both axes. 80 Demand 72 Industry's Short-Run Supply 64 56 -+ 48 Equilibrium 40 PRICE (Dollars per snapback) 32 24 16 8 0 72 144 216 288 360 432 504 576 648 720 QUANTITY (Thousands of snapbacks) At the current short-run market price, firms will in the short run. In the long run