Chapter 12R, Problem 1FRQ

a)

To determine

The graph of a hot dog stand under current market conditions by labeling the equilibrium quantity and the equilibrium price.

Explanation of Solution

The following graph represents the hot dog stand under current market conditions:

  

In this graph, the price is located on the vertical axis and the horizontal axis represents the quantity.

The equilibrium quantity is 10,000 which is shown on the graph by labeling Q_E and the equilibrium price is on the vertical axis which is labeled by P_E.

Economics Concept Introduction

Introduction: The marketing condition describes the state of a sector of the economy under which people utilize the marketing circumstances as an indicator to guide their judgments.

b)

To determine

The economic profit or loss for hot dog stand.

Explanation of Solution

The economic profit for the hot dog stand would be calculated as:

Profit:

  $\begin{array}{l}\text{= }\left(\text{P}-\text{AC}\right)\text{×Q}\hfill \\ =\left(3-1\right)\times 10,000\hfill \\ =2\times 10,000\hfill \\ =20,000\hfill \end{array}$

Here, P is the price and AC is the average cost

Economics Concept Introduction

Introduction: The difference between the money collected from the sale of an output and the costs of all the inputs required, including the opportunity costs as well, is known as an economic profit or loss.

c)

To determine

The shaded area of the profit or loss on the graph.

Explanation of Solution

The graph will represent the area of profit as follows:

  

The shaded area indicates the area of profit.

Economics Concept Introduction

Introduction: The difference between the money collected from the sale of an output and the costs of all the inputs required, including the opportunity costs as well, is known as an economic profit or loss.

d)

To determine

What will happen to the price and quantity of hot dog stand with the license fee?

Explanation of Solution

The price of the usual hot dog stand will rise as a result of the license fee because the average cost curve will shift upward but, in this case, the number of hot dog stands will remain the same. It happens because marginal revenue and Marginal cost still intersect at the same location and the marginal cost remains constant.

Economics Concept Introduction

Introduction: The difference between the money collected from the sale of an output and the costs of all the inputs required, including the opportunity costs as well, is known as an economic profit or loss.

e)

To determine

The impact of the license fee on the graph by labeling anything that changed.

Explanation of Solution

After the impact of the license fee, the graph will be shown as:

  

The graph shows that the average cost curve shifts upward by imposing a license fee which means the profit is affected by the license fee. Now, profit got smaller for hot dog stand.

Economics Concept Introduction

Introduction: The difference between the money collected from the sale of an output and the costs of all the inputs required, including the opportunity costs as well, is known as an economic profit or loss.

f)

To determine

What would happen to the number of hot dog stands over the course of the season?

Explanation of Solution

Many hot dog stands may exit the business during the course of the season. It can happen because the number of stands will decline with the decrease in profits of the industry over the course of the season. Firms don’t want to be part of the industry when there is no possibility of an increase in profits or the industry is already experiencing a decline in its earnings.

Economics Concept Introduction

Introduction: The difference between the money collected from the sale of an output and the costs of all the inputs required, including the opportunity costs as well, is known as an economic profit or loss.