(6 points) The Capital Catering Company specializes in making hors d\'oeuvres fo
ID: 1124514 • Letter: #
Question
(6 points) The Capital Catering Company specializes in making hors d'oeuvres for receptions. Its goal is to maximize profit. A small business operated out of a rented test kitchen, it has fixed costs (FC) of $2,000 per week for space rental plus variable costs (VC) for labor and ingredients. Six weekly output levels (Q) and associated VC appear below. To lay the foundation for management decisions, please complete the table below with total cost (TC), average variable cost (AVC), average total cost (ATC), incremental change in variable cost (aVC), incremental change in quantity (AQ), and marginal cost (MC) (calculated from the incremental change numbers). Round AVC, ATC and MC yalues to two decimal places (cents). 1. 0 2,0co 0 248 800 784 1,600 2,800 3. 231.2 .oo!2.oy |y.5g |SN. Isse !Soo 1,416 2,400 L 3.12 D 1,952| 3,20015200- 2. Ide 800 | 53 180 2. (8 points) Capital has a major client willing to contract to pay $3 per item. Should it accept a contract at this price in the long run (beyond the end of the current kitchen lease)? If so, what output levels sould be profitable in the long run? Should it accept a contract at this price in the short run? If so, what output levels be profitable in the short run? What is the most profitable output level? How did you identify the most profitable output level? a. could b. c. d.Explanation / Answer
(2)
(a) In the long run, firm will seek to earn profits such that price exceeds ATC. Therefore, Capital will accep the contract to sell at a price of $3 if it can produce output levels of either 1,952 units or 2,200 units, since onlt for these two output levels, Price is higher than ATC and economic profit will be earned.
(b) In the short run, Capital would aim to cover its varable costs with revenue, therefore price should exceed AVC. For output levels of 784, 1416, 1952 and 2200 units, price is higher than AVC, adn these output levels are viable.
(c) Most profitable output level is that level for which price equals MC (and MC is rising). The correct values of MC (= Change in TC / Change in Q) are as follows.
When Q = 1,952 units, Price > MC and when Q = 2,200 units, Price < MC. Therefore the profit maximizing output level is 1,952 units.
(d) The most profitable output level is identified using the prie-MC equality condition.
Q TC Change in TC Change in Q MC 0 0 248 800 800 248 3.23 784 1,600 800 536 1.49 1,416 2,400 800 632 1.27 1,952 3,200 800 536 1.49 2,200 4,000 800 248 3.23Related Questions
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