Question

Suppose Amari operates a handicraft pop-up retail shop that sells cardigans. Assume a perfectly competitive market structure for cardigans with a market price equal to $20 per cardigan. The following graph shows Amari's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for cardigans for quantities zero through seven (including zero and seven) that Amari produces.

Answer 1

The question deals with the calculation of total revenue, total cost, and profit for products in a perfectly competitive market, and determining the profit-maximizing quantity of production where marginal revenue equals marginal cost.

Step-by-step explanation:

The question involves calculating total revenue, total cost, and profit for a perfectly competitive firm. Using the given market price of $20 per unit, total revenue can be calculated by multiplying the number of cardigans sold by the price. Total cost must be provided or calculated from data points on a cost curve graph. Profit is found by subtracting total cost from total revenue. The provided scenario also details a perfectly competitive firm's profits at a given quantity and price, relating this to economic profits and illustrating it graphically using rectangles corresponding to revenues and costs, and the shaded region indicating profit.

In the example regarding Doggies Paradise Inc., we calculate total revenue as the number of dog coats sold multiplied by the market price of $72 each. Fixed costs and variable costs are combined to calculate total costs. Marginal revenue and marginal cost are calculated as the change in total revenue and total cost from selling one additional unit, respectively. The profit-maximizing quantity is determined where marginal revenue equals marginal cost (MR = MC). Graphical representations can aid in visualizing these relationships and identifying the profit-maximizing output level.