Answer to Question #228767 in Microeconomics for Swagger

Question

The investors of Smith Autos have put up $500,000 to construct a building and purchase all equipment required to wash cars. The investors expect to earn a minimum return of 10% on their investment. If the money to set up the business had been borrowed from a bank instead, the car wash owners would have paid a 10% interest rate. The car wash is open 50 weeks per year and washes 800 cars per week. Whether operative or not, the company must pay $1,000 per week return to investors and $1,000 per week as insurance. The variable costs for the 800 weekly washes includes $1,000 labour cost and $600 materials cost. There are many car washes of equal quality and service in the area and they charge $5 per car wash.

1.  Graphically represent the company's performance, showing profit or loss.

Answer 1

This market structure is perfectly competitive, so as P > AVC and P > ATC (5 > 4.5), then Smith Autos is profitable.Here number of washes on horizontal axis and $ on vertical axis) so, the graph will look like this -