Question

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. If Laura sells 20 wedding cakes per month, her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200 (for the 19th, 20th, and 21st cakes) and there are no fixed costs. In order to maximize profits, Laura shoulda. make more than 20 wedding cakes per month.b. make fewer than 20 wedding cakes per month.c. continue to make 20 wedding cakes per month.d. We do not have enough information to answer the question.

Answer 1

Answer:

The correct answer is option a.

Explanation:

The monthly total revenue is $5,000.

The marginal cost of producing 19th, 20th and 21st unit is $200.

Laura will earn profit if the price is able to cover marginal cost.

Total revenue is the product of price and quantity.

Price of cake when Laura produces 19 units

= $\frac{TR}{Q}$

= $\frac{5,000}{19}$

= $263.15

Price of cake when Laura produces 20 units

= $\frac{TR}{Q}$

= $\frac{5,000}{20}$

= $250

Price of cake when Laura produces 21 units

= $\frac{TR}{Q}$

= $\frac{5,000}{19}$

= $238.09

So we see that the price is able to cover marginal cost till 21st units, so Laura should produce more than 20 units and go on producing till price becomes equal to marginal cost.