In a perfectly competitive market there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400. a. Using only variable costs, what is the donut shop’s daily profit? - Now assume that the owner is thinking of adding a second location downtown. The capital investment required is $4,000 (Sunk Cost). The $4000 is Sunk Cost. The normal rate of return is 5%. b. If the new shop could operate under the same conditions as the original location is it a good business decision to expand? c. What would be the new shop’s daily profit?
In a perfectly competitive market there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400. a. Using only variable costs, what is the donut shop’s daily profit? - Now assume that the owner is thinking of adding a second location downtown. The capital investment required is $4,000 (Sunk Cost). The $4000 is Sunk Cost. The normal rate of return is 5%. b. If the new shop could operate under the same conditions as the original location is it a good business decision to expand? c. What would be the new shop’s daily profit?
Chapter8: Perfect Competition
Section: Chapter Questions
Problem 4.7P
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. In a perfectly competitive market there is a donut shop that sells 1,200 donuts daily. Each donut sells for the market price of $0.75 and they sell out every day. Assume that this company has labor costs of $275 and materials costs of $400.
a. Using only variable costs, what is the donut shop’s daily profit?
- Now assume that the owner is thinking of adding a second location downtown. The capital investment required is $4,000 (Sunk Cost). The $4000 is Sunk Cost. The normal rate of return is 5%.
b. If the new shop could operate under the same conditions as the original location is it a good business decision to expand?
c. What would be the new shop’s daily profit?
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