At its current level of production, a pizza restaurant receives $20 for each piz

Question

At its current level of production, a pizza restaurant receives $20 for each pizza
sold. The short-run average total cost is $10. At the price of $20, the restaurant’s
marginal cost curve crosses the marginal revenue curve at an output level of 100
pizzas.
i. What is the restaurant’s current profit?

Assume that for the pizza restaurant industry, buyers have high demand
elasticity and this industry does not require high set up costs. Will the current
profits for the typical firm described in subquestion i. remain? Explain why.

Explanation / Answer

Current profit is 100 units times $20 price less $10 cost equals 100*10= $1000. The profits will not remain because there are not significant barriers to entry (low set up costs) and the high demand elasticity means customers will buy many more pizzas at a lower price. Thus there is encouragement for additional firms to enter the market which will lower the price and eliminate the economic profits.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.