Based on the best available econometric estimates, the market elasticity of demand for your firm’s product is −2.5. The marginal cost of producing the product is constant at $225, while average total cost at current production levels is $300.

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A new restaurant – Uovo – has just opened in West L.A. It is serving the upscale market, with truly outstanding pasta that is flown in overnight from Bologna, Italy. Uovo offers a fixed-price menu with appetizer, three dishes of pasta, and a delicious tiramisu for dessert. The restaurant faces the following demand function: Q = 600 - 4P where Q is the number of guests per day. The marginal cost is constant at $50 per customer (including expenses for ingredients and personnel). The restaurant is paying a rent of $2,000 per day. What is the profit-maximizing number of guests that Uovo should serve each day, and what price should Uovo charge to maximize profit? What is the elasticity of demand at the optimal price and quantity? Is demand elastic or inelastic at this point? From what we learned in class, does it make sense for the restaurant to operate in this area of the demand curve (elastic/inelastic part)? What is the profit of the restaurant at the optimal price and quantity, and what…

If there are significant economies of scale in an industry, then Multiple Choice   a firm that is large may be able to produce at a lower unit cost than can a small firm.   a firm that is large will have to charge a higher price than will a small firm.   entry to that industry will be easy.   firms must differentiate their products to earn economic profits.