Economics Homework Help

Question

Imagine that you own a small chain of pizza parlors. You’re analyzing sales and costs for one type of pizza: a 16-inch pizza that has always sold well. Sales have increased in the past when you’ve offered a price cut, so you decide to do it again. Also, you’re moving into a big holiday weekend, and you don’t want to lose sales to competitors. Your pizza price is $20 per unit. Your variable costs are $8 per unit. Fixed costs total $20,000. You forecast 10,000 pizza sales. to be sold. Will you earn an accounting profit from this sale of pizza? Explain why or why not?

Answer 1

Accounting profit is found by subtracting total costs from total revenue. The formula is:

TR - TC = Accounting profit

TR = Price x Quantity

TC = fixed costs + variable costs

In this problem, TR = 10,000 x $20 = $200,000

TC = $20,000 + $8 x 10,000 = $100,000

Accounting profit = $200,000-$100,000 = $100,000

Since Accounting profit is positive because total revenue is higher than total cost, yes, you will earn accounting profit.