Josie’s Pussycats sells ceramic kittens. The marginal cost of producing a particular kitten depends on how many kittens Josie produces, and is given by the formula MC = 0.8Q. Thus, the first kitten Josie produces has a marginal cost of $0.80, the second has a marginal cost of $1.60, and so on. Assume that the ceramic kitten industry is perfectly competitive, and Josie can sell as many kittens as she likes at the market price of $16.
a. What is Josie’s marginal revenue from selling another kitten? (Express your answer as an equation.)
b. Determine how many kittens Josie should produce if she wants to maximize profit. How much profit will she make at this output level? (Assume fixed costs are zero. It may help to draw a graph of Josie’s marginal revenue and marginal cost.)
c. Suppose Josie is producing the quantity you found in (b). If she decides to produce one extra kitten, what will her profit be?
d. How does your answer to part (c) help explain why “bigger is not always better”?
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