A friend owns an ice cream shop. Aware of your current studies in economics, the friend asks for your help in determining what she should do regarding her shop in the winter. Her shop is very profitable in the spring, summer, and fall. However, she gives you the following data for the profit maximizing level of production regarding the winter (assume she only sells ice cream cones):
Average Fixed Cost = $2
Average Variable Cost = $1
Marginal Revenue = $1.50
a) Other things constant, should your friend continue to operate in the winter months? Be sure to explain to her why she should or should not continue to operate.
b) In the following year, your friend asks for your help again. All of the data remain the same; however your friend finds that she is no longer profitable in the spring, summer, or fall months. What advice would you give to her under these circumstances? Why?