Question 2 a The Whampoa Gourmet Place houses a number of restaurants of various

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Question 2

a The Whampoa Gourmet Place houses a number of restaurants of various styles. Some restaurant owners close their shops during off-peak hours (2:00 pm–6:00 pm) but others keep their shops open. Explain this phenomenon.

b At its current level of production a firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm’s marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units.

i Is the firm maximizing profit? Briefly explain.

ii What is the firm’s current profit? Show your calculation steps.

iii Will new firms enter this market and if so, why?

Explanation / Answer

A) This is a practice of capturing more market share by those firms which do not shut their shops. These firms will attract more customers in both the off and on timings.

B) (i) Yes, as MR is equal to MC

(ii) Profit = (P-ATC)Q = (12.5-10)1000 = 2500

(Iii) Yes, since the firms already in the market are earning positive economic profits, which will attract more producers in the market.

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