Quick Meal is a fast food outlet in Mona that sells box lunches for $120 each. Its total cost function is TC = 80,000 +...
Quick Meal is a fast food outlet in Mona that sells box lunches for $120 each. Its total cost function is TC = 80,000 + 20Q + 0.02Q2
a. Should the owners close the restaurant? Explain!
b. What is the profit /loss of the business?
Homework Answers
Answer
a)
No.
A firm shuts down if the price is below minimum average varible costs.
the firm produces at MC=P
MC=change in total cost =dTC/dQ=20+0.04Q
equating the MC=P
20+0.04Q=120
0.04Q=100
Q=2500
AVC=VC/Q
VC=20Q+0.02Q^2 ................ the TC except for constant term
AVC=20+0.02Q
AVC=20+0.02*2500
AVC=70
the P>AVC so the firm can produce to minimize losses or to maximize profit.
==============
b)
Profit=TR-TC
TR=P*Q=2500*120=300000
TC=80000+20*2500+0.02*2500^2=255000
Profit=300000-255000
=45000
the economic profit is $45000
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