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(Solved): 11. Profit maximization using total cost and total revenue curvesSuppose Madison operates a handicra ...
11. Profit maximization using total cost and total revenue curves
Suppose Madison operates a handicraft pop-up retail shop that sells rompers. Assume a perfectly competitive market structure for rompers with a market price equal to $25 per romper.
The following graph shows Madison's total cost curve.
Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for rompers for quantities zero through seven (including zero and seven) that Madison produces.
Calculate Madison's marginal revenue and marginal cost for the first seven rompers 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.
Madison's profit is maximized when they produce a total of rompers. At this quantity, the marginal cost of the final romper they produce is , an amount than the price received for each romper they sell. At this point, the marginal cost of producing one more romper (the first romper beyond the profit maximizing quantity) is , an amount than the price received for each romper they sell. Therefore, Madison's profit-maximizing quantity occurs at the point of intersection between the curves. Because Madison is a price taker, the previous condition is equivalent to
Expert Answer
The question statement states:(A) Each romper costs $20, and