 # Scenario 6 Peter operates an ice cream shop in the center of Fai...

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1. Peter should sell 80 ice creams in one day where his marginal cost MC is equal to marginal revenue MR at \$2.80 in order to maximize his profits.

2. When Peter maximizes his profits, the revenue he earns is equal to the TR (total revenue) = Quantity * Price
TR= 80*4.40 = \$352

3. Peter should charge a price of \$4.40 where MC equals MR.

4. When peter maximizes his profits at 80 units per day, his average total cost is equal to \$2.20 and hence his total costs per day = 80 * 2.20 = \$176.

5. The maximum amount of profit earned by Peter per day is equal to total revenue – total cost and hence profit = \$352-\$176 = \$176

Scenario 2. A competitive firm sells its output for \$20 per unit. When the firm produces 200 units of output, average variable cost is \$16, marginal cost is \$18, and average total cost is \$23.

6. Total revenue = 200*20 = \$4000
Total costs = 200*23=\$4600
Loss = 4000-4600 = \$600
Total variable costs = 200*16 = 3200
As the firm is able to cover its variable costs, it will continue to run in the business and will not shut down. The firm will shut down when its price is lower than its average variable costs that is at \$16 as any quantity sold below the price of \$16, the firm will not be able to cover even the average variable costs at \$16 and this will force the firm to shut down in the long run.

7. The firms average fixed costs = average total costs – average variable costs
AFC= \$23-\$16 = \$7...

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