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Q. Bud Owen operates Bud's Package Store in a small college town. Bud sells six packs for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud operates in a highly competitive market with a considerably large number of firms. In fact, he has no control over the current $2.50 per six pack selling price. Bud's total cost function is:
TC = 2000 + 0.0005Q2
Where Q refers to six packs per week. Included in the fixed cost figure is a $750 per week salary for Bud, which he considers to be his opportunity cost.
(a) Find Bud's marginal cost function.
(b) Calculate Bud's profit maximizing output level.
(c) What is his profit.
(d) Is this an economic or an accounting profit? Explain.
(e) The town council has voted to impose a tax of $0.50 per six packs sold in the town, hoping to discourage beer consumption. Calculate Bud's profit maximizing output level after the tax. What is Bud's profit after the tax?
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