Question

Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should

Answer 1

reduce her production level.

Step-by-step explanation:

In a perfectly competitive market, firms will maximize their accounting accounting profits when marginal cost = marginal revenue. In this case, Jennifer's marginal cost is higher than her marginal revenue, therefore she should cut back on her production until her marginal cost decreases to $110 per batch of cookies.

Another characteristic of a perfectly competitive market is that both suppliers and consumers are price takers, so they must buy and sell at the market price. So instead of producing 110 batches of cookies, Jennifer should only produce 109, 108 ... or the number where her marginal cost is $110.

Answer 2

To maximize her profit, Jennifer should abandon the product.

Step-by-step explanation:

To maximize the profit Jennifer should keep marginal benefit as higher as she can, this could happen keeping marginal revenue higher and marginal cost lower as much as she can.

In this case marginal cost is higher than the marginal revenue, which is resulting as a marginal loss. Each extra batch being sold will add a loss of $10 ($110-$120).

Jennifer should abandon the product because it will reduce the average marginal benefit or total profit gradually.