Question: Bud Owen operates Bud's Package Store in a small college town. Bud sells six packs of beer for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud's is the only beer retailer physically located within the town limits. He faces considerable competition, however, from sellers located outside of town. Bud regards the market as highly competitive and considers the current exist2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are: TC = 2000 + 0.0005Q^2 MC = 0.001Q, where Q refers to six packs per week. Included in the fixed cost figure is a exist750 per week salary for Bud, which he considers to be his opportunity cost.
a. Calculate the profit maximizing output, q*, for Bud. Show it in a graph and label everything.
b. What is his profit at q*. That is, determine the level of Product = TR - TC at q*?
c. Is this an economic profit or an accounting profit? Explain.