Tanisha owns a small bakery. She wants to maximize? profit, and thinking back to

Question

Tanisha owns a small bakery. She wants to maximize? profit, and thinking back to? microeconomics, she decides she wants to produce a quantity of cakes that will minimize her average total cost. Will her strategy possibly maximize profits for the? bakery?

A.

?Yes; Since her cake shop is in a perfectly competitive? market, the only way to maximize profit is to produce the quantity where average total cost is minimized.

B.

Not? necessarily; This strategy will only maximize her profit in the long? run, but not in the short run.

C.

?No; In order to maximize? profit, she would never want to produce the quantity where average total cost is minimized.

D.

Not? necessarily; Depending on? demand, she might maximize profit by producing a quantity other than that where average total cost is at a minimum.

Explanation / Answer

A bakery is a perfectly competitive market. Here in the short run profit is maximized by producing at P=MC and price should be greater than average variable cost. In the long run, profit is maximized by producing at P=MC=min(ATC). So Tanisha can not maximize profit by producing at min(ATC) in the short run. It will be helpful for her bakery shop to maximize profit in the long run. So option B is correct.

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