3. Profit maximization using total cost and total revenue curves Suppose Lorenzo runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a price-taker market, and the market price is $10 per teddy bear. The following graph shows Lorenzo'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 Lorenzo produces, including zero teddy bears. 125 Total Cost O 100 Total Revenue 75 A Profit 50 TOTAL COST AND REVENUE (Dollars) 25 0 -25 -50 2 3 4 5 6 7 8 QUANTITY (Teddy bears)Calculate Lorenzo'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. 30 O 25 Marginal Revenue 20 Marginal Cost COSTS AND REVENUE (Dollars per teddy bear) 15 10 5 0 0 1 2 3 4 6 7 8 QUANTITY (Teddy bears)Lorenzo's profit is maximized when he produces |:] teddy bears. When he does this, the marginal cost of the previous teddy bear he produces is |:] , which is V than the price Lorenzo receives for each tedcy bear he sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize his profit) is , which is V than the price Lorenzo receives for each teddy bear he sells. Therefore, Lorenzo's profitmaximizing quantity corresponds to the intersection of the V curves. Because Lorenzo is a price taker, this last condition can also be written as V total cost and marginal revenue marginal cost and total revenue total revenue and profit mar inal cost and mar inal revenue 9 9 reduces C] teddy bears. When he does this, the marginal cost of the previous teddy bear he produces is total cost and total revenue the price Lorenzo receives for each teddy bear he sells. The marginal cost of producing an additional teddy would maximize his profit) is , which is V than the price Lorenzo receives for each teddy t-maximizing quantity corresponds to the intersection of the V curves. Because Lorenzo is a price taker, this last condition can also be written as V P = MC MC = TR TC = TR Lorenzo's profit is maximized when he produces teddy bears. When he does this, the marginal cost of the previous ted $ , which is than the price Lorenzo receives for each teddy bear he sells. The marginal cost of producing Profit = MR - MC bear (that is, one more teddy bear than would maximize his profit) is $ , which is than the price Lorenzo Profit = TR - TC bear he sells. Therefore, Lorenzo's profit-maximizing quantity corresponds to the intersection of the curves. Because Lorenzo is a price taker, this last condition can also be written as