Question

Assume Tim Horton is currently earning short-run economic profits.  

1. Show and explain its profit maximization output, price and short run economic profit.  

Answer:

2. What will happen to Tim Horton economic profit in the long run? explain.

Answer:

3. In Long run, would Tim Horton produce the productively efficient output? Explain.

Answer:

Answer 1

A. The profit maximising level is attained where marginal cost curve intersects the marginal revenue curve. In case of economic profits, the equilibrium price lies above the average cost curve of the firm.

b. In the long run, other firms will be attracted to the business by looking at Tim Horton's economic profits. Mor efirms will increase supply in the market and reduce the market price. Due to this, the economic profits of Time Horton will get wiped out and it will earn zero economic profits or normal profits.

C. In the long run, Tim Horton will produce the productively efficient output. This is because in the long run, it will earn zero economic profits. This means that the equilibrium price level will be equal to the lowest average cost of the firm. This implies productive efficiency.