The table below shows the total cost (TC) and marginal cost (MC) for Choco Lovers, a perfectly competitive firm producing different quantities of chocolate gift boxes. The market price of a gift box is $5 per box.

The table below shows the total cost (TC) and marginal cost (MC) for Choco Lovers, a perfectly competitive firm producing different quantities of chocolate gift boxes. The market price of a gift box is $5 per box.
a. Fill in the marginal revenue (MR) and average revenue (AR) columns.
 

b. Given a price of $5 per gift box, how many gift boxes should Choco Lovers produce?

     25 gift boxes

     What will be the profit per gift box?

     $ -0.08 ± .01

c. Suppose that Choco Lovers raises the price of gift boxes to $7 per gift box. How many gift boxes should Choco Lovers produce now?

     30 gift boxes

     What will be the new profit per gift box?

     $ 1.6 ± .01

Explanation

a. Since the market for chocolate gift boxes is assumed to be a competitive market, a supplier can sell any quantity for the market price of $5. If a supplier increases the quantity sold by one unit, revenue will increase by the price this unit is sold for, which is the market price of $5. Therefore, MR is also $5. AR is the average revenue per unit sold and is calculated as TR/quantity.

b. Choco Lovers reaches a profit maximum when MR = MC. The MR and MC curves intersect at a quantity of 25. Therefore, Choco Lovers maximizes profits when producing a quantity of 25 gift boxes. Profit per gift box = average revenue − (total cost/output). Profit per unit equals $5 – ($127/25) = $-0.08.

c. If the market price rises to $7, MR equals $7. This is because now every additional unit can be sold for $7. The new MR curve is graphed as a horizontal line at $7 and intersects with MC at a quantity of 30 gift boxes. Profit per gift box = average revenue − (total cost/output). Profit per unit equals $7 – ($162/30) = $1.60.

Thanks