Between 5 a.m. and 6 a.m., Dotty’s Deli serves an "early bird special" for $5 (the only item on the menu). The cost of waiters, cooks, food and other variable costs average out to $4.50 per meal; the costs of the lease, insurance, and other fixed costs average out to $1.50 per meal. Assume Dotty makes more than enough profit during the 6 a.m. to 10 a.m. breakfast rush to cover the losses on the early bird meal special. To maximize profit, Dotty should:
A. Continue selling the special in the short and long run.
B. Continue selling the special in the short run but stop selling it in the long run.
C. Raise the price of the special to above $6.
D. Stop selling the early bird special and only open at 6 a.m.
Close the store immediately.
A. Continue selling the special in the short and long run.
To analyze the profitability of the early bird special at Dotty's Deli, we need to consider the cost and revenue associated with selling this special.
1. Cost Calculation:
- Variable costs per meal: $4.50
- Fixed costs per meal: $1.50
2. Revenue Calculation:
- Price of the early bird special: $5
To maximize profit, Dotty's Deli should compare the revenue generated with the cost per meal.
Revenue per meal = Price of the early bird special = $5
Cost per meal = Variable costs + Fixed costs = $4.50 + $1.50 = $6
Since the cost per meal is equal to the price of the early bird special, the revenue generated is sufficient to cover all costs, resulting in a breakeven situation. Therefore, Dotty's Deli should:
A. Continue selling the special in the short and long run.
Selling the early bird special allows Dotty's Deli to generate revenue that covers all the costs associated with it. Additionally, Dotty's Deli makes more than enough profit during the breakfast rush to compensate for any potential losses on the early bird special.