Asked by Matthew Castanon on Jul 06, 2024
Verified
Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should:
A) close her doors immediately.
B) continue producing in the short and long run.
C) continue producing in the short run, but plan to go out of business in the long run.
D) raise her prices above the perfectly competitive level.
E) lower her output.
Perfectly Competitive Eatery
A theoretical model where a restaurant operates in a market with many buyers and sellers, none of which can influence prices.
Breakfast Special
A promotional deal or menu option offered by restaurants specifically for breakfast meals, often at a reduced price.
Costs
The expenses or value sacrificed in the production or procurement of goods and services.
- Link the notions of average variable cost (AVC), average total cost (ATC), and minimum efficient scale to the short-run and long-run determinations of a firm.
- Ascertain instances where entities should sustain operations or discontinue in the immediate term, by comparing the price with AVC and ATC.
Verified Answer
SK
simon kaboreJul 09, 2024
Final Answer :
C
Explanation :
Bette's total average cost per meal is $3.95 (variable costs) + $1.25 (fixed costs) = $5.20, which is higher than the selling price of $5.00. This means she is not covering her total costs in the long run, but since the price covers the variable costs, she should continue in the short run and plan to exit in the long run.
Learning Objectives
- Link the notions of average variable cost (AVC), average total cost (ATC), and minimum efficient scale to the short-run and long-run determinations of a firm.
- Ascertain instances where entities should sustain operations or discontinue in the immediate term, by comparing the price with AVC and ATC.