The Skyline Chili restaurant sells, well, chili. Suppose their total cost curve is
and their marginal cost curve is
where q = pints of chili.
T = 0.12 + + 10
= 0.2 + 1
a. Suppose Skyline Chili can sell as many pints as it wishes at $5 per pint. Given the cost curves
above, how many pints should Skyline sell in order to maximize profits? How do you know? (5)
b. What is Skyline’s total profit if it sells the profit-maximizing amount of chili? (5)
c. Suppose the rent it pays for its restaurant space rises. This rental rate is of course not affected by the
amount of chili produced or sold. After this increase in rent, the firm’s new cost curves are
and
T = 0.12 + + 20 = 0.2 + 1
Assume the market price of chili is unchanged. What is the profit maximizing number of pints of chili
that the firm should sell, now that the rental rate has gone up? How much profit does the firm earn
now? Explain (5).
d. Ignore the increase in rent discussed above. Suppose instead that the cost of ground beef goes up,
and that this changes the firm’s cost curves so that they are
T = 0.12 + 2 + 10
And
= 0.2 + 2
Again, assuming no change in the market price of a pint of chili, how many pints should the firm sell?
What is its profit now? (5).