Kate's 24-hour breakfast diner menu offers one item, a $5.00 breakfast special. kate's costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal. her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal. since the market is highly competitive, kate should
Kate will continue to operate in the short-run but plan on she will exit the business in the long-term
Kate's decision should be guided by her business's performance in terms of profitability. Kate is selling her meal at $5, but her total cost of serving the meal is $5.20. It means the business is operating at a loss.
Kate must start plantation on how she will leave that business. She may continue operating but only for a short while. Soon, she will find it hard to stay open because the business is loss-making. Kate will, therefore, continue operations in the short run. In the long term. Kate must plan on exiting the business.
The correct answer is option c.
The price of Kate's breakfast special is $5.
The average variable cost is $3.95.
The average fixed cost is $1.25.
The average total cost
= $3.95 + $1.25
The price is not covering the average total cost but it is covering the average variable cost. The firm can continue operating in the short run but stop production in the long run.
The firm should focus on operating during the short-term and plan to exit in the long run.
Price of the meal = $5
Fixed cost = $ 1.25
Variable cost = $3.95
Total cost = 1.25 + 3.95 = $5.20
The price which is offered i.e. $5 is less than total cost i.e. $5.20
The price offered is also greater than the variable cost which is $3.95
Thus, the firm should focus on operating during the short-term and plan to exit in the long run as the market seems to be highly competitive.
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