Mr. Harvey operates the only florist shop in an isolated small town. He grows hi

Question

Mr. Harvey operates the only florist shop in an isolated small town. He grows his own tulips and estimates his cost to be $2.00 per dozen. He can sell the tulips at the closest wholesale market for $3.00 per dozen (net of transportation costs). He uses the tulips along with other flowers he purchases to make floral arrangements that he sells to customers. To maximize his profits from selling his floral arrangements, Mr. Harvey should:

Set the price of the arrangements equal to the marginal cost of the arrangements; he should assess the marginal cost of tulips used in the arrangements at $2.00 per dozen.

Explanation / Answer

To maximize his profits from selling his floral arrangements, Mr. Harvey should set the price of the arrangements at some level above marginal cost of the arrangements; he should assess the marginal cost of tulips used in the arrangements at $3.00 per dozen. The florist is the only shop so he can enjoy the benefits of a monopoly. He will charge a price above the marginal cost and will always want to take away whatever the consumer surplus is there at a price given to be $3 per dozen.

Thus the correct option should be "set the price of the arrangements at some level above marginal cost of the arrangements; he should assess the marginal cost of tulips used in the arrangements at $3.00 per dozen".

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