Consider the information provided in the below table. Support the market price drops to only $5 per pizza. In the short run, should this pizza shop continue to make pizza, or will it maximize its economic profits (that is, minimize its economic loss) by shutting down?
The table below represents the hourly output and cost structure for a local pizza shop. The market is
Total Hourly Output and Sales of Pizzas | Total Hourly Variable Cost ($) |
0 | 5 |
1 | 9 |
2 | 11 |
3 | 12 |
4 | 14 |
5 | 18 |
6 | 24 |
7 | 32 |
8 | 42 |
9 | 54 |
10 | 68 |
Concept Introduction:
Economic profit: The economic profit 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.
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