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

Rodrigo should take the additional business as he breaks even on the 1,001st article of clothing, potentially keeping or attracting more customers without any immediate monetary loss, although he needs to consider any hidden costs and long-term business strategy.

Step-by-step explanation:

Rodrigo faces a decision in his dry-cleaning business regarding whether to accept additional business when the cost of servicing the 1,001st article of clothing is exactly equal to the price charged to the customer. We analyze this decision as follows:

• If Rodrigo's cost for cleaning the 1,001st item is $5 and he charges $5, then he is breaking even on that unit. This is option (e) from the provided choices. In this case, Rodrigo does not gain or lose money on this additional unit.
• However, if there are any hidden costs or the opportunity for added revenue from future business as a result of taking on more work, this break-even analysis could change.
• Other factors like customer satisfaction, reputation, and long-term strategic goals need to be considered beyond the immediate cost and revenue.

Based on the information given, and ignoring any possible hidden costs and external effects on the business, the answer is e. Yes, he breaks even on the 1,001st article but does not necessarily turn away business unless the cost of an additional unit would exceed the revenue.

Answer 2

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.

Step-by-step 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.