Bob and Bill are college students. They are trying to decide what to do over the
ID: 1249107 • Letter: B
Question
Bob and Bill are college students. They are trying to decide what to do over the next summer. Bob's father has suggested that they both come and work at his plastics manufacturing company where each will earn $3,600 over the summer. Bill's father, who runs the local farmer's market, suggests that they go to a local resort area and sell fresh fruit and vegetables to tourists. Their markup on the produce would be twenty-five percent, so each $1.00 of revenue would involve a variable cost of $0.80. In addition to purchasing the produce, they would have to rent a location. The cost to rent a small roadside stand for the summer is $2,400. (i) How many dollars worth of produce will they have to sell in order to break even in an accounting sense? (ii) How many dollars worth of produce will they have to sell in order to break even in an economic sense?Explanation / Answer
(i) Break even implies price equal average total cost P=ATC Average total cost is the sum of average variable cost and averaged fixed cost. P=AVC+AFC Average fixed cost is fixed cost divided by quantity P=AVC+FC/Q Substitute the values from the problem and do algebra. 1=0.8+2400/Q Q=2400/(1-0.8) Q=12000 (ii) 3600 is an opportunity cost. We treat it like a fixed cost because it does not change with quantity. Q=(2400+3600)/(1-0.8) Q=30000