Question

Suppose that a couple of months after the new pizza restaurant opens, the local government institutes a $14 per pizza price ceiling. If you buy a $14 pizza from Pizzazzy a week later (and assuming Pizzazzy is behaving rationally), what do you know about the marginal cost, average total cost, and average variable cost at the profit maximizing point of production after the price ceiling is imposed?

Answer 1

The information about the marginal cost, average total cost, and average variable cost at the profit-maximizing point of production when a price ceiling has been imposed will be:

• Not higher than $10.
• Higher than $14.
• Higher than $10.

From the complete question, it should be noted that under perfect competition, in order to maximize profit, the price will be equal to the marginal cost. Based on the information given, the marginal cost won't be more than $10 due to the fact the ceiling price is at this price. Therefore, the marginal cost won't be more than $10.

A firm in perfect competition will earn economic profit in the long run when the profit becomes zero. Therefore, the average total cost must be higher than $14.

Finally, the average variable cost won't be more than $10. This is because the price can't fall below the equilibrium price in order to maximize profit in perfect competition.

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