Suppose Latasha runs a small business that manufactures frying pans. Assume that the market for frying pans is a price-taker market, and the market price is $10 per frying pan.
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 the first seven frying pans that Latasha produces, including zero frying pans.
(GRAPH)
Calculate Latasha's marginal revenue and marginal cost for the first seven frying pans 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.
(GRAPH)
Latasha's profit is maximized when she producesfrying pans. When she does this, the marginal cost of the previous frying pan she produces is, which is than the price Latasha receives for each frying pan she sells. The marginal cost of producing an additional frying pan (that is, one more frying pan than would maximize her profit) is, which is than the price Latasha receives for each frying pan 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.