Asked by maggie Radziszewski on May 12, 2024
Verified
Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Ronny's profit maximizing decisions?
A) No impact on the restaurant's decisions
B) Ronny's will remain in business but will definitely produce less pizza.
C) Ronny's will definitely shut down.
D) Ronny's decision depends on the circumstances-if their profits are larger than $250 per year, then the tax does not impact output; otherwise, Ronny's Pizza House will shut down.
Profit Maximizing
refers to a firm's goal of achieving the highest possible profit, where marginal costs equal marginal revenue, guiding pricing and production decisions.
Perfectly Competitive
A market configuration where numerous small businesses are present, with each selling identical items, coupled with the absence of entry or exit hurdles and complete transparency of information among consumers and vendors.
Optimal Output
The level of production that results in the highest possible profit for a firm, determined by the point where marginal cost equals marginal revenue.
- Analyze the impact of external costs (such as taxes) on a firm’s optimal production and profitability in a competitive market.
Verified Answer
GQ
Guillermo QuintanillaMay 16, 2024
Final Answer :
D
Explanation :
Ronny's decision will depend on their profitability. If their profits are larger than $250 per year, then the tax will not impact their output or their decision to stay in business. However, if their profits are less than the tax amount, then the tax will reduce their profits and they may choose to shut down.
Learning Objectives
- Analyze the impact of external costs (such as taxes) on a firm’s optimal production and profitability in a competitive market.