Question

Aji Fatou owns a rental space in New York and is thinking of opening a restaurant in that space. The total cost of operating the restaurant is C(Q) = 20Q, where Q is the number of customers at the restaurant in a day. The market demand for restaurants is Q = 100 – p. Aji Fatou has the option of leasing out this space instead of opening a restaurant. The market rent for her property is $600. If Aji Fatou is operating as a perfectly competitive firm. Derive Aji Fatou's Accounting profit and Economic Profit.

a. Accounting Profit = $2,200 and Economic profit =$0.00

b. Accounting Profit = $600 and Economic profit =$0

c. Accounting Profit = $2,200 and Economic profit =$1,600

Answer 1

We have C(Q) = 20Q

And Q = 100-P. And P = 100 - Q.

Total Revenue = Q.P = 100Q - Q^2

Marginal revenue = 100 - 2Q (Taking the first order derivative of total revenue).

Also, by taking the first order derivative of cost function, we get the marginal cost.

Thus, MC = 20

Now, Aji will maximise profits at the point where marginal revenue is equal to the marginal cost.

Or where 100 - 2Q = 20

Or, 2Q = 80 or Q = 40 units.

The profit maximising price level is P = 100 - 40 = $60.

Thus, total revenue = 40 × 60 = $2400.

Total cost = 20 × 40 = $800

Thus, accounting profit = Total Revenue - Total Cost = 2400 - 800 = $1600.

In order to find economic profit, we deduct the opportunity cost of $600 from the acoounting profit to get $1000 as an economic profit.

This is the required answer for the given values.