Maxine's Cookie Shop sells chocolate chip cookies in a perfectly competitive market for $2 per dozen. Maxine currently produces 200 dozen cookies per day and average total cost at this level of production is $1.75. What level of profit is this firm earning? Explain.
To determine the level of profit earned by Maxine's Cookie Shop, we need to calculate the firm's total revenue and total cost.
Total revenue (TR) is calculated by multiplying the price per unit by the quantity sold. In this case, Maxine sells cookies at $2 per dozen, so the price per unit is $2. Given that Maxine produces 200 dozen cookies per day, the quantity sold is also 200 dozen:
TR = Price per unit x Quantity sold = $2 x 200 dozen = $400
Now let's calculate the total cost (TC) incurred by Maxine. The question states that the average total cost (ATC) at this level of production is $1.75. Average total cost is calculated by dividing total cost by the quantity produced:
ATC = Total cost / Quantity produced
Since the average total cost is given as $1.75 and the quantity produced is 200 dozen cookies, we can rearrange the formula to find the total cost:
Total cost = ATC x Quantity produced = $1.75 x 200 dozen = $350
Finally, we can calculate the profit (π) using the formula:
Profit = Total revenue - Total cost
Profit = TR - TC = $400 - $350 = $50
Therefore, the firm is earning a profit of $50 at the current level of production.