Question

Qty of Big Mac Total Cost 0 $ 100 10 130 20 150 30 165 40...

Qty of Big Mac Total Cost

0 $ 100

10 130

20 150

30 165

40 177

50 187

60 200

70 220

80 260

90 320

100 400

e) What is McDonald's break-even price? Explain.

f) What is McDonald's shut-down price? Explain.

g) Suppose the price of a Big Mac is $5, in the short-run, how many Big Mac should McDonald produce to maximize profit? What is the firm's profit at the profit maximizing output? In the short-run should the firm produce or shut down? Explain.

h) Suppose the price of a Big Mac is $2, in the short-run, how many Big Mac should McDonald produce to maximize profit? What is the firm's profit at the profit maximizing output? In the short-run should the firm produce or shut down? Explain.

i) The price of a Big Mac is $1.50, at this price McDonald shut-down, is this the right decision? Explain. What is the firm's profit or loss in this situation? Explain.

Homework Answers

Answer #1
Q TC FC VC MC AVC ATC
0 100 100 0
10 130 100 30 3.00 3.00 13.00
20 150 100 50 2.00 2.50 7.50
30 165 100 65 1.50 2.17 5.50
40 177 100 77 1.20 1.93 4.43
50 187 100 87 1.00 1.74 3.74
60 200 100 100 1.30 1.67 3.33
70 220 100 120 2.00 1.71 3.14
80 260 100 160 4.00 2.00 3.25
90 320 100 220 6.00 2.44 3.56
100 400 100 300 8.00 3.00 4.00

e) The breakeven price would be where P=minimum ATC = 3.14 as total revenue = total cost so that profits are zero

f) The shut down price would be where P=minimum AVC = 1.67 as the firm would not want to produce below this price because it wont be able to cover its variable costs.

g) p=5,

Setting P=MC for profit maximization, the firm should produce as the price is above its minimum AVC

Output = 80 units

Profit = P-ATC*Q = (5-3.25)*80 = 140

h) P = 2

The firm will produce as price is > minimum AVC

Output = 70 units

Loss = (2-3.14)*70 = -79.8

i) P=1.5

The firm will not produce and shut down as the price is less than its minimum AVC and because it is not able to cover its variable cost of running the business, it should shut down

Total loss = its fixed cost = -100

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