Bud Owen Operates Bud's Package Store in a Small College

question 94

Essay

Bud Owen operates Bud's Package Store in a small college town. Bud sells six packs of beer for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud's is the only beer retailer physically located within the town limits. He faces considerable competition, however, from sellers located outside of town. Bud regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are:
TC = 2000 + 0.0005Q²
MC = 0.001Q,
where Q refers to six packs per week. Included in the fixed cost figure is a $750 per week salary for Bud, which he considers to be his opportunity cost.
a. Calculate the profit maximizing output for Bud. What is his profit? Is this an economic profit or an accounting profit?
b. The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What impact will the tax have on Bud? Should Bud continue to operate? What impact will the tax have on Bud's out-of-town competitors?

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Definitions:

Ethical Egoism

The belief that actions are morally right if they benefit the individual making the decision.

Utilitarianism

A moral theory that suggests that the best action is the one that maximizes utility, usually defined as that which produces the greatest well-being of the greatest number of people.

Altruism

The selfless concern for the well-being of others, often manifesting in actions that prioritize others' interests above one's own.

Authority

The authority or capability to issue commands, make choices, and ensure compliance.