Chapter 23, Problem 4P

To determine

The table below represents the hourly output and cost structure for a local pizza shop. The market is perfectly competitive, and the market price of a pizza in the area is $10. Total costs include all opportunity costs. Fixed costs equal zero.

Total Hourly Output and Sales of Pizzas	Total Hourly Variable Cost ($)
0	5
1	9
2	11
3	12
4	14
5	18
6	24
7	32
8	42
9	54
10	68

a) Calculate the total revenue and total economic profit for this pizza shop at each output level.

b) Assuming that the pizza shop always produces and sells at least one pizza per hour, does this appear to be a situation of short-run or long run equilibrium?

c) Calculate the pizza shop’s marginal cost and marginal revenue at each rate of output. Based on marginal costing analysis, what is the profit maximizing rate of output for the pizza shop?

d) Draw a diagram depicting the short-run marginal revenue and marginal cost curves for this pizza shop, and illustrate the determination of its profit-maximizing output rate.

Concept Introduction:

Economic profit: The economic profit of a firm is calculated by deducting total revenue from total cost. The total costs consists of both implicit and explicit costs. Explicit cost is the ordinary costs of the firm like rent, salaries to the employees etc. Implicit cost is also known as imputed cost describes as the opportunity cost of anything.

Perfect competition: The perfect competition is a type of free market where there is freedom of entry and exit. In this market, firms are selling homogenous products. The characteristics of perfect competition are, there are many buyers and sellers, firms have the freedom of entry and exit meaning at any time a new firm can enter into the market or an existing firm can leave the market.