A bicycle shop finds that the cost of staying open an extra hour is $20 in labor

Question

A bicycle shop finds that the cost of staying open an extra hour is $20 in labor and energy costs and that sales during that hour are $25. Should the shop stay open for the extra hour?

A. No, because it isn’t worth staying open for such a small amount of money.

B. Yes. So long as marginal revenue exceeds marginal cost, the shop will have higher profits if it stays open.

C. No. The shop owner should minimize costs, and thus close early, rather than incur another $20 of expenses.

D. Yes. The social benefit of providing an extra work hour exceeds the private cost, even if the shop does not make any sales during the hour.

E. Whether the shop should stay open the extra hour depends on whether the shop is earning enough to cover its fixed costs.  

Explanation / Answer

A bicycle shop finds that the cost of staying open an extra hour is $20 in labour and energy costs and that sales during that hour are $25. Then, Yes,the shop stay open for the extra hour. So long as marginal revenue exceeds marginal cost,the shop will have higher profits if it stays open. Here, marginal revenue =$25 and Marginal cost =$20.

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