Question

Your restaurant is identical to others in its homothetic production technology, which employs labor and capital and has decreasing returns to scale. a. In addition to paying for labor and capital each week, each restaurant also has to pay recurring weekly fees in order to operate. Illustrate the average weekly long-run cost curve for your restaurant. b. On a separate graph, illustrate the weekly demand curve for hamburgers in your city as well as the short-run industry supply curve assuming that the industry is in long-run equilibrium. How many hamburgers do you sell each week? c. As you are happily producing burgers in this long-run equilibrium, a representative from the national MacWendy’s chain comes to your restaurant and asks you to convert your restaurant to a MacWendy’s. It turns out, this would require no effort on your part; you would simply have to allow the MacWendy’s company to install a MacWendy’s sign, change some of the furniture, and provide your employees with new uniforms, all of which the MacWendy’s parent company is happy to pay for. MacWendy’s would, however, charge you a weekly franchise fee of for the privilege of being the only MacWendy’s restaurant in town. When you wonder why you would agree to this, the MacWendy’s representative pulls out his marketing research that convincingly documents that consumers are willing to pay $ more per hamburger when it carries the MacWendy’s brand name. If you accept this deal, will the market price for hamburgers in your city change? d. On your average cost curve graph, illustrate how many hamburgers you would produce if you accepted the MacWendy’s deal. e. Next, for a given , illustrate the largest that could be in order for you to accept the MacWendy’s deal.

Added by Maryam V.

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