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A baker wants to establish a pie factory
A baker wants to establish a pie factory. The cost of leasing the factory is $1,000 per day. The profit-maximizing quantity of pies is 1,000 pies a day. Each pie sells for $3 and costs only $2.10 to make. Which of the following is a correct conclusion based on this information?
The baker will enjoy profits of $900 per day.
At the profit-maximizing quantity, the baker's producer surplus is -$200.
The baker should not enter the industry.
The baker will enjoy profits of $3,000 per day.
Expert Solution
Given,
Number of Pies to be sold per day for Profit maximization = 1,000
Selling Price per Pie = $3
Cost of Making per Pie = $2.10
Cost of Leasing per Day = $1,000
Profit or Loss = Sales - Cost of Making - Cost of Leasing
= (1,000*$3) - (1,000*$2.10) - $1,000
= $3,000 - $2,100 - $1,000
Loss = -$100
So, there is a loss of $100. The baker should not enter the industry.
So, the correct option is 3rd "The baker should not enter the industry".
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