The following table shows a bakery’s average total cost for producing holiday fr

Question

The following table shows a bakery’s average total cost for producing holiday fruitcakes in a perfectly competitive market:

                        Quantity                                  Average Total Cost

                              1                                                    $10

                              2                                                    $15

                              3                                                    $20

If the price of fruitcakes is $25 per fruitcake, how many should the bakery sell to maximize profit?

Explanation / Answer

Answer is 2.

Explanation:

As the profit maximization point is at marginal revenue equals to Marginal cost. Therefore, the firm shall produce maximum 2 units as the marginal cost of 3rd unit is more than marginal revenue. The table has been made as under:

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