Answer to Question #109468 in Microeconomics for jack

Question

Lawrence plan to start a restaurant business at a mega shopping mall. To start a business, it incurs cost and revenue. Based on the restaurant context,
(a) Identify the fixed and variable inputs for this business by providing examples.
(b) Discuss TWO (2) main types of costs to start this business by providing relevant examples to explain both costs. (hint: it can be based on your answer in (a).)
(c) Explain the way Lawrence determine his profit for this business. (hint: please provide explanation of the formula/equation/approach if the formula/equation/approach is relevant.)
(d) Identify the type of market that this business operates (perfect competition/ monopoly/ monopolistic/ oligopoly) by relating to the THREE (3) characteristics of this business to the market structure.
(e) Provide ONE (1) approach that Lawrence can use to determine the equilibrium output for his business.
(f) Discuss the long-run and short-run profit of this business.
(g) Explain the shut-down point of this business.

Answer 1

a)Fixed costs include ,,rent ,bank intrest insurance and equipment leases

Variable cost includes ,,, salaries ,taxes and marketing costs

b)Types of cost

Fixed costs -these are business costs that are not dependent on the level of goods produced by the business.

Variable cost- these are expenses that change in proportion to changes in output produced.

c)Ways of determining profit

Gross profit margin -it compares the gross profit to sales revenues.It shows how much a bussiness taking into account the needed cost to produce the good or service.

Return on assets -it shows the Percentage of assessment net earning of relative to company total assets

$ROA =$ $Net income \over Assets$ $×100$

Break even analysis -it is a method used to determine the number of products a company should sell to cover its costs.

d)Market it operates in is a monopolistic competition.

Characteristics

-Large number of buyers and sellers

-Products are differentiated

-There is free entry and exit in the market.

e)Approach that can be used to find equilibrium.

At equlibrium the quantity demanded is equal to the quantity supplied .Equating these two equations gives the equlibrium quantity and equlibrium price.

f) Long run and short run profit if the business.

In the long run ,the demand curve of a monopolistic firm shifts such that it tangent to the firms total cost curve.As a result the firm will not be able to make profit but it can break even.

In the short run , a monopolistically competetive firm maximizes profit or minimizes losses by producing that quantity that corresponds to when marginal revenue = marginal cost. If average total cost is below the market price, then the firm will earn an economic profit.

Shutdown of the business

A monopolistically competetive firm shuts down production, if price is less than average variable cost in the short run.If price is less than average variable cost, then the firm incurs a smaller loss by not producing than by producing.