Three college students are considering operating a tutoring business in economic

Question

Three college students are considering operating a tutoring business in economics. This business would require that they give up their current jobs at the student recreation center, which pays $6,000 per year. A fully equipped facility can be leased at a cost of $8,000 per year. Additonal costs are $1,000 a year for insurance and $0.50 per person per hour for materials and supplies. Their services would be priced at $10 per hour per person.

A) What are fixed cost?
B) What are variable costs?
C) What is the marginal cost?
D) How many students would it take to break even?

Explanation / Answer

A) $9,000 (facility rent + insurance)
B) $0.50 per hour (materials & supplies)
C) 

 

Let S = number of students

Problem doesn’t say how many hours they work. I am assuming 40 hours * 50 weeks = 2000 hours per year, per person

6000*S = 10*2000*S – ( 8000 +1000 .50*2000*S )
6000*S = 20000*S – 9000 – 1000*S
13000*S = 9000
S = 9/13; So one person working 9/13 of a full time job breaks even.

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