Consider the market for fast food pizzas to be effectively perfectly competitive
ID: 1143434 • Letter: C
Question
Consider the market for fast food pizzas to be effectively perfectly competitive. In the early 2000's most companies had the same cost structures. However Domino's Pizza invested significantly in its information technology systems. One of the outcomes of this today has been to allow it to sell pizzas for less than its competitors. Given Domino's size it has been able to greatly increase supply of pizzas to the market. Answer the following questions a. Phil owns a pizza shop in Charters Towers. Currently the market price of pizzas in Charters Towers is $8 each. At Phil's profit maximising output of as of 400 pizzas per week, his average total cost (which includes opportunity cost) is $4 per pizza. Given this, there is incentive for people to this market. Type E for Enter, X for Exit or R for Remain In. b. Phil is considering whether he should convert his store to become a Domino's franchise in Charters Towers. If he does so, his new average total cost (which includes opportunity cost) will be $2.50 per pizza at a profit maximising output of 500 pizzas per week. Using the relevant information in part a., how much extra economic profit will Phil earn per week by changing his existing store over to sell pizzas as a Domino's franchisee? Assume the price for pizzas remains at $8 each and Phil operates at the profit maximising output level in both his original pizza shop and the Domino's shop Answer to the nearest whole number (with no decimal places) c. Phil has just spent $1,200 on new uniforms for the staff in his existing pizza shop. Phil cannot use these uniforms if he became a Domino's franchisee. Should he consider this expenditure in deciding whether to switch over to become a Domino's franchisee? Type Y for Yes or N for NoExplanation / Answer
A. Price, P = $8, Output, Q = 400 units, ATC = $ 4 per unit
Revenue = PQ = $8 * 400 = $ 3200
Cost = $ 4 * 400 = $ 1600
Profit = $ 1600 (= $ 3200 - 1600).
Yes there is incentive for people to Enter the market.
B. After becoming Domino's franchisee the ATC = $ 2.5 per unit and output = 500 units
Revenue after becoming franchisee = $8*500 = $ 4000
Cost = Q*ATC = $2.5*500 = $ 1250
Profit = $ 4000 - 1250 = $ 2750
Additional profit after becoming franchisee = $ 2750 - $ 1600
= $ 1150.
C. When Phil switches from self owned to franchisee the additional profit earned by him is $ 1150.
As he just got new uniform for his employees which costed him $ 1200. Thus, if he considers this it will be termed as Sunk Cost Fallacy.
In the short run the cost has already incurred to him. Thus, if he switches to franchisee he will still earn a net profit of $ 1550.
Hence he should not consider the uniform cost because in the long run he will earn a higher profit.