Suppose Latasha runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is $20 per shirt.

The following graph shows Latasha's total cost curve.

Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven (inclusive) that Latasha produces.

Total Revenue

Profit

0

1

2

3

4

5

6

7

8

200

175

150

125

100

75

50

25

0

-25

TOTAL COST AND REVENUE (Dollars)

QUANTITY (Shirts)

Total Cost

7, 135

Calculate Latasha's marginal revenue and marginal cost for the first 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 at each quantity.

Marginal Revenue

Marginal Cost

0

1

2

3

4

5

6

7

8

40

35

30

25

20

15

10

5

0

COSTS AND REVENUE (Dollars per shirt)

QUANTITY (Shirts)

Latasha's profit is maximized when she producesshirts. When she does this, the marginal cost of the last shirt she produces is, which is than the price Latasha 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 than the price Latasha receives for each shirt she sells. Therefore, Latasha's profit-maximizing quantity corresponds to the intersection of the curves. Because Latasha is a price taker, this last condition can also be written as .