The table above shows output and costs of Evan's Subs, a typical perfectly competitive firm in a local market for sandwiches. Evan's fixed cost is $9 per hour. The current market price of a sandwich is $9. Answer the next four questions based on the information in the table. Output/ Average total Cost 1/ 17.00 2/ 10.00 3/ 8.00 4/ 8.00 5/ 8.80 6/ 10.00 1) What is Evan's marginal revenue from the 3rd sandwich sold? ______ 2) If Evan's sells the 4th sandwich, the marginal cost is ________ the marginal revenue, so the firm's profit ________. A) greater than; decreases B) greater than; increases C) less than; increases D) less than; decreases      

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(1) Because the firm is perfectly competitive, the marginal revenue is simply the price, which we are given: $9.00 per sandwich.

To answer (2), we need to work out what the marginal cost is.

Going from the 3rd to 4th sandwich, the average total cost remains at $8.00 per sandwich. Since the average total cost is not changing, it must be equal to the marginal cost; so the marginal cost is $8.00.

Another way of seeing this is to simply work out what the total cost must be, and see how it changes as we add another sandwich. Multiply the given figures for average total cost by quantity produced to get these total costs:

1 / $17.00
2 / $20.00
3 / $24.00
4 / $32.00
5 / $44.00
6 / $60.00

The change in total cost by going from 3 sandwiches to 4 sandwiches is $8.00, so the marginal cost of the 4th sandwich is $8.00.

Now we can answer the question; since the marginal cost of $8.00 is less than the marginal revenue of $9.00, the profit will increase if we sell the 4th sandwich. Thus, the answer to part (2) is (C).

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