Question

Shama is producing candles in a perfectly competitive market. When she produces 500 candles, her total cost is $250. If she produces one additional candle, her total cost increases to $260. In order to maximize her profit, she should produce the additional candle

A) if the market price for a candle is $12.


B) only if the market price exceeds $260 for a candle.


C) only if the market price exceeds $250 for a candle.


D) if the market price for a candle exceeds $0.50.


E) if her price exceeds her average total cost.


Please explain why

Answer 1

A) if the market price for a candle is $12.

Explanation:

In this problem, by producing one additional unit, Shama has an incremental cost of $10, which is much higher than her previous cost per unit ($0.50). In order for her to make a profit from this additional unit, the market price for a candle must be higher than the incremental cost.

Analyzing the options, the prices presented in options B and C are not practicable in a perfectly competitive market since they assume absurd profit margins. Option D presents a price that would not result in a profit for the additional unit, since it is lower than $10. Option E doesn't necessarily guarantee maximum profit, only that she doesn't operate at a loss.

Therefore, option A, if the market price for a candle is $12, is the correct answer since it proposes a viable price that generates profit for the additional unit.