Suppose Jason Owns a Small Pastry Shop

question 178

Multiple Choice

Suppose Jason owns a small pastry shop. Jason wants to maximize his profit, and thinking back to the microeconomics class he took in college, he decides he needs to produce a quantity of pastries which will minimize his average total cost. Will Jason's strategy necessarily maximize profits for his pastry shop?

• A) Yes; Since Jason's pastry shop is in a perfectly competitive market, the only way to maximize profit is to produce the quantity where average total cost is minimized.
• B) Not necessarily; This strategy will only maximize Jason's profit in the long run, but not in the short run.
• C) No; In order to maximize profit, Jason would never want to produce the quantity where average total cost is minimized.
• D) Not necessarily; Depending on demand, Jason may maximize profit by producing a quantity other than that where average total cost is at a minimum.

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Definitions:

Net Income

The net income of a company once all costs and taxes are deducted from the total revenue.

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's cost. It measures the profitability or efficiency of an investment.

Cost of Capital

The yield a corporation needs to generate from its investment endeavors to keep its market valuation stable and draw in financing.

Hurdle Rate

The minimum rate of return on a project or investment required by a manager or investor to proceed with the project.