Sometimes we don't have information on firm fixed costs, but we can use their behavior in the market to figure it out. This question walks you through how you would do that. You want to open an ice-cream store on Bloor Street but don't know what rents are (and suppose you can't find out easily). Assume rent is the only fixed cost. Since you're going to open an ice-cream store yourself, you have enough information to estimate Marginal Costs as MC = 1+0.001q. You also notice that when the market price of an ice-cream cone falls to $3, the ice-cream stores on Bloor stay open for the month (i.e. short-run) but they close down their business the following month (i.e. the exit in the long-run). What can you infer about store rents on Bloor street with this information?

Sometimes we don't have information on firm fixed costs, but we can use their behavior in the market to figure it out. This question walks you through how you would do that. You want to open an ice-cream store on Bloor Street but don't know what rents are (and suppose you can't find out easily). Assume rent is the only fixed cost. Since you're going to open an ice-cream store yourself, you have enough information to estimate Marginal Costs as MC = 1+0.001q. You also notice that when the market price of an ice-cream cone falls to $3, the ice-cream stores on Bloor stay open for the month (i.e. short-run) but they close down their business the following month (i.e. the exit in the long-run). What can you infer about store rents on Bloor street with this information?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.6IP

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