Question

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.

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