Rodrigo operates a dry-cleaning service and charges customers $5 per article of
ID: 1128514 • Letter: R
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?
No, he has hidden costs that far exceed his estimate of $5, so he loses money.
No, taking on additional business doesn’t earn him any money.
Yes, if he turns away business, his service will be forced to close.
Maybe. If a competitor is accepting that many customers, he must at least equal that amount.
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 / Answer
Ans:
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.
The profit maximizing level of output is where marginal revenue is equal to marginal cost. hence when the service cost is $5 for 1,001st piece , he breaks even and is indifferent.since he is indifferent he takes additional business of 1,001st piece But turns away business when the cost of the additional unit exceeds the income.
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