7. The table below provides information about Sarah’s Doughnut Shoppe, a small firm
operating in a perfectly competitive industry. Use this information to answer the next set
of questions.
Quantity of doughnuts Total revenue Total cost
Profit
100
$200
$250
200
400
360
300
600
530
400
800
725
500
1,000
950
a. What is the market price for a doughnut?
b. Fill in the profit column of the table. At what level of output does Sarah’s
Doughnut Shoppe maximize its profits?
c. Calculate Sarah’s Doughnut Shoppe’s marginal cost and marginal revenue for
each level of output. Use the table below to organize your results.
Quantity of
Total
Total Marginal Marginal
Doughnuts Revenue Cost
Cost
Revenue
100
$200
$250
200
400
360
300
600
530
400
800
725
500
1,000
950
Profit
d. What is the relationship between marginal revenue and marginal cost at the profitmaximizing level of output for Sarah’s Doughnut Shoppe? Explain the meaning
of this relationship and how it relates to profitability.
7. a. Because total revenue equals price times quantity sold, we can use this equation to
find the price of a doughnut. When TR = $200, Q = 100 and price is $2. When TR =
$400, Q = 200 and price is $2. In a perfectly competitive industry the price the firm
sells its product for stays constant and is the market price.
b. According to the table, Sarah’s Doughnut Shoppe maximizes its profits when it
produces 400 doughnuts.
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
c.
Quantity of
Total
Total Marginal Marginal
Doughnuts Revenue Cost
Cost
Revenue
100
$200
$250
$1.10
$2
200
400
360
1.70
2
300
600
530
1.95
2
400
800
725
2.25
2
500
1,000
950
Profit
-$50
40
70
75
50
d. 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.