Annual earthquake insurance premiums only make sense as a fixed cost since the insurance premiums don't change with each meal sold or not sold. As we learned, and as shown above, an increase in fixed costs doesn't affect profit maximizing price and output for the firm since neither marginal revenue nor marginal cost change. So, there should be no change in price or in number of meals sold.

  

6. Suppose a small town in Northern California has only one restaurant. Suppose the annual earthquake insurance premiums for that restaurant increase. Which of the following would we expect in the short-run:

1. An increase in prices and no change in the number of meals sold. This would require a simultaneous increase in demand and an increase in variable costs.
2. An increase in prices and a decrease in the number of meals sold. This would be true only if variable costs rose.
3. No change in prices and no change in the number of meals sold.
4. A decrease in prices and no change in the number of meals sold. This would require a simultaneous decrease in demand and an decrease in variable costs.
5. An decrease in prices and an increase in the number of meals sold. This would be true only if variable costs fell.

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