Question

Guinan operates the Ten Forward Convenience Store in a small college town. Guinan sells six packs of beer for off-premises consumption. Guinan has very limited store space and has decided to limit her product line to one brand of beer, choosing to forego the snack food lines that normally accompany her business. Guinan's is the only beer retailer physically located within the town limits. She faces considerable competition, however, from sellers located outside of town. Guinan regards the market as highly competitive and considers the current $4.50 per six pack selling price to be beyond her control. Guinan's total cost function is: TC = 2000 + 0.002Q2 where Q refers to six packs per week. Included in the fixed cost figure is a $750 per week salary for Guinan, which she considers to be her opportunity cost. [For all answers, round to the nearest dollar value and omit spaces, commas, and dollar signs.]

a. Calculate the profit maximizing output for Guinan.

b. What is her profit?

c. Is this an economic profit or an accounting profit?

d. The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What is Guinan's new profit?

e. Should Guinan continue to operate?

Answer 1

C.This is an accounting profit because economic profit also includes opportunity cost which is equal to 750.Since 750 is not included in profits,it is accounting profit.

D.A tax of .5 would raise the MC by .5.

New MC=.004Q+.5

At equilibrium:

4.5=.004Q+.5

.004Q=4Q

Q=1000

TR=1000*4.5=4500

TC=2000+.002Q^2+.5Q(we got TC by integrating MC)

TC=4500

Profit=4500-4500=0

She can operate at this point because she is yet not incurring losses.