Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Ronny's profit maximizing decisions?
A) No impact on the restaurant's decisions
B) Ronny's will remain in business but will definitely produce less pizza.
C) Ronny's will definitely shut down.
D) Ronny's decision depends on the circumstances-if their profits are larger than $250 per year, then the tax does not impact output; otherwise, Ronny's Pizza House will shut down.

Question

Quizplus · Accepted Answer

Ronny's decision will depend on their profitability. If their profits are larger than $250 per year, then the tax will not impact their output or their decision to stay in business. However, if their profits are less than the tax amount, then the tax will reduce their profits and they may choose to shut down.

Ronny's Pizza House Is a Profit Maximizing Firm in a Perfectly