We have cost information (summarized in the following graphs) of two firms in th

Question

We have cost information (summarized in the following graphs) of two firms in the market of restaurants: Koki's Restaurant and Pepito's Gourmet food. Koki's Restaurant Pepito's Gourmet Food MC ATC MR-P MR-P Assuming that both firms are in the long run. Most likely market, and profits exit the keep operating and making O A Pepito's Gourment Food, Koki's restaurant, zero B. Koki's restaurant, Pepito's Gourmet Food, negative O CKoki's restaurant, Pepito's Gourment Food, zero OD Pepito's Gourment Food, Koki's restaurant, positive OEPepito's Gourment Food, Koki's restaurant, (there is no way to know how much its profits are).

Explanation / Answer

Each firm will produce output such that P=MC. For Koki's resteraunt the output level at which P=MC, the ATC is less than Price and so Koki's resteraunt is earning a positive profit and so it will remain in the market. On the other hand for pepito's gourmet food, the output at which P=MC, the ATC is greater than P which implies that it makes a loss and so it will exit the market.

Thus the correct answer is option D

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