Question

SCENARIO 9.5: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 percent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $1,000 per week in other fixed costs. Variable costs include $1,000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $3 on average per meal. 11. Refer to Scenario 9.5. The weekly economic profit is (show me your work; calculate TR and TC to get profits) A) $1,000. B) $0. C) -$900. D) -$3,600. 12. Refer to Scenario 9.5. In the long run, the restaurant will want to A) operate and expand. B) operate but not expand. C) shut down but not go out of business. D) go out of business.

Answer 1

11)

Let us calculate the total costs

Variable cost=wages+other variable costs=1000+600=$1600 per week

Fixed Cost=Opportunity cost+other fixed cost=520000*(10%/52)+1000=$2000 per week

Total Cost=TC=Fixed cost+variable cost=1600+2000=$3600 per week

Total Revenue=TR=3*900=$2700 per week

Economic profit=TR-TC=2700-3600=-$900 per week

Correct option is

C) -$900

12)

Loss is less than fixed cost. So, firm should continue to operate.

Firm is making a loss in short run. So, in long run, price tend to increase as some of restaurants will go out of market. In long run price will be equal to minimum ATC. Demand remains unchanged in long run in this case. So, there is no need to expand.

Correct option is

B) operate but not expand

13)

If restaurant decides to shut down in short run,

Revenue =0 as there is no sale

Variable cost=0 as variable cost depends upon output level

Correct option is

D) has no, earns no