Carl's Cornerspot, a popular university eatery in a competitive market, has seat¬

ing and staff capacity to serve about 600 lunch customers every day. For the past two months, demand has fallen from its previous near-capacity level. Concerned about his declining profit, Carl decided to take a closer look at his costs. He con¬ cluded that food was the primary cost that varied with meals served; the remain¬ ing costs of $1650 per month were committed in the short run. With demand averaging 550 lunches per day for the past two months, Carl thought it was rea¬ sonable to divide the $1650 committed fixed costs by the current average de¬ mand of 550 lunches to arrive at an estimate of $3 of support costs per meal served. Noting that his support costs per meal had now increased, he contem¬ plated raising his meal prices slightly. Comment on Carl's choice of activity level for computing costs per meal, and on what will happen if Carl uses his approach if demand decreases further.

LOS