You have decided to open your own fruit stand. To do so, you have to pay $200 fo

Question

You have decided to open your own fruit stand. To do so, you have to pay $200 for the stand and $100 per month to rent a space. The wholesale price of fruit is $0.25 per kilogram. To hire an assistant you need costs $5 per hour. If you open the stand for a month (twenty 8-hour days) and sell 1000 kilograms of fruit per day, find each of the following: a) Total cost, total fixed cost, total variable cost, and average cost per kilogram (for the month). b) The marginal cost of a kilogram of fruit. c) The opportunity cost of opening the stand for a month. Assume that, if you didn’t open the fruit stand, you could manage a yogurt shop and make $10 per hour.

Explanation / Answer

(a)

(i) Fixed cost = payment for stand + rent = $200 + $100 = $300

(ii) Variable cost = payment for assistant = $5 x 20 days x 8 hours = $800

(iii) Total cost = FC + VC = $300 + $800 = $1,100

(iv) Average cost per Kg = TC / quantity = $1,100 / 1,000 = $1.1 per kg

(b)

Marginal cost of 1 kg of fruit = variable cost per unit = $5 per hour x number of hours required (on average) to sale 1 kg of fruit

= $5 per hour x (8 hours / 1,000) = $0.04 per Kg

(c)

Opportunity cost for a month = Hourly income from alternative option x number of hours per month

= $10 per hour x 20 days x 8 hours/day = $1,600 per month

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