3. Profit maximization using total cost and total revenue curves Suppose Rosa runs a small business that manufactures teddy bears. Assume that the market for teddy bears is a competitive market, and the market price is $20 per teddy bear The following graph shows Rosa's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green paints (triangle symbol) to plot profit for teddy bears quantities zero through seven (inclusive) that Rosa produces 2 200 o 175 Total Revenue 150 Total Cost A 125 Profit 100 TOTAL COST AND REVENUE Dollars) 75 30 25 25 0 2 7 . QUANTITY (Teddy bears) Calculate Rosa's marginal revenue and marginal cost for the first seven teddy bears 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 at each quantity 2 o 35 Marginal Revenue 30 0- 25 Marginal Cost COSTS AND REVENUE (Dollars per teddy bear 20 15 10 0 1 QUANTITY (Teddy bears) Rosa's profit is maximized when she produces teddy bears. When she does this, the marginal cost of the last teddy bear she produces is which is than the price Rosa receives for each teddy bear she sells. The marginal cost of producing an additional teddy bear (that is, one more teddy bear than would maximize her profit) is which is than the price Rosa receives for each teddy bear she sells. Therefore, Rosa's profit maximizing quantity corresponds to the intersection of the curves Because Rosa is a price taker, this last condition can also be written as