Question

Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local gov imposes a new tax of $250 per year on all restaurants operating in the city. How does this affect Ronny's profit maximizing decisions?

A. No impact

B. Ronny's will remain in business but will produce less pizza

C. Ronny's will shut down

D. Ronny's decision depends on circumstances - if their profits are larger than $250 per year, the tax does not impact output; otherwise, Ronny's pizza will shut down.

Answer 1

D. Ronny's decision depends on the circumstances -- if their profits are larger than $250 then the tax does not impact output; otherwise, Ronny's pizza House will shut down.

This is so because if the profits are higher than $250, then a tax of $250 will leave Ronny with some profit even after the tax, which will provide incentive to continue producing. If profits are lower than $250 then post tax he will incur loss thereby making it more profitable to shut down.

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