Marginal analysis and profit maximization Suppose Janet gives haircuts on Saturdays to make extra money. She is the only person in town cutting hair on Saturdays and therefore has some market power. Assume that she does not incur fixed costs and that the only significant variable cost to Janet in giving haircuts is her time. As she gives more haircuts, Janet must increasingly forgo other valuable Saturday activities. For example, if she gives one haircut, she forgoes reading the paper after breakfast. If she gives two haircuts, she gives up reading the paper, sleeping an extra half-hour, and so on. Janet's clients are a varied group willing to pay between $20.00 and $30.00 for a haircut. Assume that Janet cannot price discriminate—that is, charge different clients different prices. If Janet charges $30.00 per haircut, she will have one client per week; if she charges $27.50, she will have two; if she charges $25.00, three, and so forth. The following table contains data on the revenues and costs of Janet's haircut business as a function of her price–quantity choice. (The costs are based on the value of Janet's alternative activities, in dollar terms. For example, the total cost of the first haircut is $5—the value Janet places on reading the newspaper after breakfast.) Also, marginal profit is the additional profit Janet earns from producing one more unit of output. Marginal profit is positive when a rise in output increases total profit and negative when a rise in output causes total profit to fall. Fill in the missing cells of the table and then use them to answer the questions that follow. On the following graph, use the blue points (circle symbol) to plot Janet's total revenue curve, use the orange points (square symbol) to plot her total cost curve, and use the purple points (diamond symbol) to plot her total profit curve. Be sure to graph from left to right, starting with zero haircuts and ending with five. Line segments will automatically connect the points. On the following graph, use the blue points (circle symbol) to plot Janet's marginal revenue (MR) curve, and then use the orange points (square symbol) to plot her marginal cost (MC) curve for the first five haircuts. Be sure to plot from left to right and to plot on the integers. For example, if Janet's marginal cost of increasing her production from one haircut to two haircuts is x, then you would plot a point at (2, x). Line segments will automatically connect the points. Note: Marginal values are sometimes plotted between integers (to indicate that they represent changes incurred in moving from one integer to the next), and sometimes they are plotted directly on the integers with which they are associated. On the following graph, be sure to plot marginal values directly on the integers with which they are associated.
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