Question

Rodrigo operates a dry-cleaning service and charges customers $5 per article of clothing. Based on his knowledge of operations, the 1,000th piece of clothing costs him $4.95 to dry clean. If he takes additional business, however, the 1,001st piece will cost $5 for the service. Does he take the additional business?a. no, he has hidden costs that far exceed his estimate of $5, so he loses money. b. no, taking on additional business doesn’t earn him any money. c. yes, if he turns away business, his service will be forced to close. d. maybe. if a competitor is accepting that many customers, he must at least equal that amount. e. yes. at a $5 cost, he breaks even and is indifferent. he necessarily turns away business when the cost of the additional unit exceeds the income.

Answer 1

Answer:

yes. at a $5 cost, he breaks even and is indifferent. he necessarily turns away business when the cost of the additional unit exceeds the income.

Explanation:

To maximize profits, a firm should continue selling until the marginal revenue product equals the marginal cost of the product. Marginal revenue product is the additional revenue from the sale of an extra cost. Marginal cost is the extra expense associated with the production of an additional unit.

Rodrigo should accept that extra business. His marginal revenue product from additional business equals the marginal cost. He will not make an accounting profit or loss but may gain a long term customer. He should decline any additional business only if the marginal cost is greater than the marginal revenue product.