Question

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should

Answer 1

Laura should make fewer than 20 cakes.

Step-by-step explanation:

This is because at this level of sales (20 cakes per month) where she makes a revenue of $5000, she is not maximizing profit.

First of all, in order to maximize profit, the Marginal Cost must be equal to the Marginal Revenue (MC = MR).

Marginal cost is the additional cost incurred in the production of an extra unit.

Marginal revenue is the revenue gained by the production of an extra unit.

Now, let us see the current revenue and check if it equals the marginal cost.

The total revenue per month from the sale of 20 cakes is $5,000. But the marginal cost incurred in the production of those same 20 cakes is 300 x 20 = $6,000.

We can now see that the costs incurred exceed the revenue and profit is not maximized.

Therefore Laura should reduce the quantity of cakes she produces.

Answer 2

In order to maximize profits, Laura should sell each cake above $300

Step-by-step explanation:

Marginal cost is given by cost divided by quantity made

Laura's marginal cost for making a wedding cake is $300. This also means the cost per wedding cake is $300

She sells 20 wedding cakes per month

Total expenditure = $300 × 20 = $6000

Total revenue = $5000

Sales per cake = $5000/20 = $250

If she sells each wedding cake $250, she would run at a loss.

To maximize profit, she say sell each wedding cake above the cost price ($300)