Question 1

A local restaurant needs to obtain a license from the local authority each year to stay in business. For the upcoming year the local authority increased the fee that it charges for this license. The restaurant has payed the fee and extended its license for another year. Last year the restaurant chose to be closed on Mondays. Assuming that the restaurant's decisions were optimal last year and that the only change is the license fee relative to last year:

a. The restaurant should not only stay open on Mondays but increase its opening hours.

b. The restaurant should remain closed on Mondays.

c. The restaurant should remain closed on Mondays but increase its opening hours on other days.

d. The restaurant should stay open on Mondays.

Question 2

Suppose equilibrium price in an industry is 300. Firms in this industry have constant AVC up to capacity. Suppose a firm has AVC of 280/unit, capacity of 50 units per month and FC of 2000 per month. (Assume that there is zero salvage value for the firm's assets and no exit costs.)

a. This firm will suspend production in the short run and exit in the long run.

b. This firm will produce up to capacity in the short run and stay in the industry in the long run.

c. This firm will produce up to capacity in the short run and exit in the long run.

d. This firm will suspend production in the short run and stay in the industry in the long run.