In a perfectly competitive market, there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400.
a. At what price would this donut shop shutdown in the short run?
b. Using only variable costs, what is the donut shop’s daily profit?
The owner is thinking of adding a second location downtown. The capital investment required is $4,000. The normal rate of return is 5%.
c. If the new shop could operate under the same conditions as the original location is it a good business decision to expand?
d. What would be the new shop’s daily profit?
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