An early-bird entrepreneur decides each morning whether to work at his local Bro
ID: 1205486 • Letter: A
Question
An early-bird entrepreneur decides each morning whether to work at his local Brooklyn artisanal bakery, or instead to assemble gourmet sandwiches to sell to office workers for lunch on Wall Street.The owner of the bakery will pay him $300 a day, and has enough local demand at the bakery to keep him busy every day of the year. If he spends the working day making sandwiches, he must pay $12.50 per day for the cost of a parking space for the hour it takes to deliver the sandwiches to office buildings.The per day variable cost of this enterprise depends on the cost of ingredients and on how many sandwiches he makes (the cost of making each additional sandwich increases with the total number of sandwiches since the entrepreneur must exert more and more effort to get them done in time for delivery). The average variable cost (in dollars per sandwich) is 2.5 + .005q, where q is the total number of sandwiches. On the morning of the last day of the year for which the annual parking charge has been paid, the sandwich price unexpectedly falls to $4.99. How many sandwiches will the entrepreneur make that day, and what is his economic profit? Suppose in part (4) that the fall in sandwich prices had occurred on the second day of the year instead of the last day of the year. How would that have changed your response to part (4)?
Explanation / Answer
Since AVC=2.5+.005q
MC=2.5+0.01q
On the morning of the last day of the year for which the annual parking charge has been paid, the sandwich price unexpectedly falls to $4.99,thus the early bird entrepreneur must make sandwiches where MR=MC
2.5+0.01q=4.99
0.01q=4.99-2.5
q=2.49/0.01
q=249
his economic profit will be zero,he will be earning normal profits .
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