Question

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?

Answer 1