The following table provides information about Sarah\'s Doughnut Shoppe, a small
ID: 1213468 • Letter: T
Question
The following table provides information about Sarah's Doughnut Shoppe, a small firm operating in a perfectly competitive industry. Use this information to answer this set of questions. What is the market price for a doughnut? Calculate Sarah's Doughnut Shoppe's marginal cost and marginal revenue for each level of output. Fill in those columns in the table. What is the profit-maximizing criterion for a price-taking firm to choose its level pf output? At what level of output does Sarah's Doughnut Shoppe maximize its profits? Fill in the profit column of the table. How does this information confirm your answer to part b? In each of the following situations, do you think the industry described will be perfectly competitive or not? Explain your answer.Explanation / Answer
Quantity of
Doughnuts
Total
Revenue
Total
Cost
Marginal
Cost
Marginal
Revenue
Profit
100
$200
$250
-$50
$1.10
$2
200
400
360
40
1.70
2
300
600
530
70
1.95
2
400
800
725
75
2.25
2
500
1,000
950
50
At the profit-maximizing level of output, MR = MC (or very close to it). Because marginal revenue is also the price of a doughnut, marginal cost is the price of a doughnut. When MR = MC, the addition to total revenue selling an additional unit of the good is the addition to total cost from producing an additional unit of the good. When MR < MC, fewer units of the good should be produced and sold in order to profit maximize.
According to the table, Sarah’s Doughnut Shoppe maximizes its profits when it produces 400 doughnuts.
C.
Quantity of doughnuts
Total revenue
Total cost
Profit
100
$200
$250
-$50
200
400
360
40
300
600
530
70
400
800
725
75
500
1,000
950
50
Quantity of
Doughnuts
Total
Revenue
Total
Cost
Marginal
Cost
Marginal
Revenue
Profit
100
$200
$250
-$50
$1.10
$2
200
400
360
40
1.70
2
300
600
530
70
1.95
2
400
800
725
75
2.25
2
500
1,000
950
50
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