QUESTION 3 Bette\'s Breakfast, a perfectly competitive eatery, sells its \"Break

Question

QUESTION 3 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. Please write the best answer choice to receive full credit and support your answer with an explanation.

Explanation / Answer

C is correct

Price= 5

Average variable cost= 3.95

Price is greater than average variable cost. Thus firm should continue produce in the short run.

Average fixed cost= 1.25

Average cost= 3.95+1.25= 5.2

Price is lower than average cost. This means firm should shut down in long run.

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