Aim for FiveMicroeconomics

Long free-response question

A new taco restaurant

  • Units 3 and 4
  • 10 points
  • About 25 minutes

You can use a calculator on this question, just like on exam day.

A long question with several lettered parts built around one scenario, often a firm in a particular market structure, and it can pull in other units such as a labor market or a payoff matrix. You identify outcomes, explain them, do a calculation, and describe a correctly labeled graph that shows the situation and how a change affects it. On the exam: Question 1 of 3 in Section II (60 minutes including a 10-minute reading period; 33.35% of the exam score); 10 points, half of the section score. About 25 minutes suggested. Four-function calculator allowed.

The question

Casa Verde is a restaurant in a monopolistically competitive market for restaurant meals. It is currently maximizing profit in the short run. At its profit-maximizing quantity of 300 meals per week, it charges $24 per meal, its marginal revenue and marginal cost are both $12, and its average total cost is $18.

Suggested time: 25 minutes

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Part (a)

2 points

Describe a correctly labeled graph for Casa Verde. Show each of the following: (i) the demand, marginal revenue, marginal cost, and average total cost curves; (ii) the profit-maximizing quantity and price; and (iii) the area of Casa Verde's economic profit or loss.

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Part (b)

1 point

Calculate Casa Verde's weekly economic profit. Show your work.

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Part (c)

1 point

Is Casa Verde allocatively efficient at its current output? Explain using the information given.

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Part (d)

2 points

Assume Casa Verde's situation is typical of firms in this market. Identify what will happen to the demand for Casa Verde's meals in the long run, and explain why.

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Part (e)

1 point

Identify Casa Verde's economic profit in long-run equilibrium, and describe where its demand curve lies in relation to its ATC curve.

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Part (f)

1 point

In long-run equilibrium, does Casa Verde produce at the quantity where its average total cost is at its minimum? Explain.

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Part (g)

1 point

Casa Verde's owner reports an accounting profit of $2,500 per week in the short run. Using the economic profit you calculated in part (b), calculate the owner's weekly implicit costs. Show your work.

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Part (h)

1 point

Identify one form of non-price competition Casa Verde could use, and explain how it is meant to affect the demand for Casa Verde's meals.

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