Reference no: EM132958842
Question - Suppose that fast food burger restaurants in Lebanon are best described as monopolistically competitive.
The management of the restaurants tells you the following:
Its total cost TC(Q) = 10Q - 4
It faces a linear downward sloping demand, such that P= a - bQ
It also knows that if it sets the price too high at $9, it does not sell any burgers.
It knows it is in long run equilibrium because there has been no entry or exit and there are no abnormal profits (TR=TC)
It is currently producing and selling at Q=1.
a. What is the restaurants' average cost, marginal cost and total cost at the current level of production?
b. Management also wants to know its demand better so that when it runs a promotional campaign, it can forecast extra sales. Find "a" and "b", using all the information provided including that the restaurant is in long run equilibrium, i.e., zero abnormal profits (TR =TC or P x Q = AC x Q or P = AC).
c. Suppose that total costs change so that new long run TC(Q)= 3 + Q.
i. Solve for the new average cost and new marginal cost.
ii. Are there economies of scale, or diseconomies of scale for fast food restaurants? Explain the two terms before answering this part.
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