Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should:
A) close her doors immediately.
B) continue producing in the short and long run.
C) continue producing in the short run, but plan to go out of business in the long run.
D) raise her prices above the perfectly competitive level.
E) lower her output.

Question

Quizplus · Accepted Answer

Bette's total average cost per meal is $3.95 (variable costs) + $1.25 (fixed costs) = $5.20, which is higher than the selling price of $5.00. This means she is not covering her total costs in the long run, but since the price covers the variable costs, she should continue in the short run and plan to exit in the long run.

Bette's Breakfast, a Perfectly Competitive Eatery, Sells Its "Breakfast Special