Question

Sterling runs a donut shop which which is being operated in a perfectly competitive market where they earn positive economic profits. If the price of a donut is $3, Sterling makes 800 donuts a month, and their monthly average total cost is $2. What are Sterling's profits each month?

Answer 1

Sterling's monthly profits are calculated by subtracting the total costs from the total revenue. With a selling price of $3 per donut and an average total cost of $2, Sterling's profits are $800 per month.

Step-by-step explanation:

To calculate Sterling's monthly profits in a perfectly competitive market, we need to calculate the total revenue and subtract the total costs. Sterling sells each donut for $3, making 800 donuts a month. Therefore, the total revenue is the price per donut times the quantity of donuts sold: 800 donuts × $3 per donut = $2400 total revenue. The total cost is the average total cost times the quantity of donuts made: 800 donuts × $2 average total cost = $1600 total cost. To determine profits, we subtract the total costs from the total revenue: $2400 - $1600 = $800 in profits.