Question

In the aftermath of a hurricane, an entrepreneur took a one-month leave of absence (without pay) from her $6,000 per month job in order to operate a kiosk that sold fresh drinking water. During the month she operated this venture the entrepreneur paid the government $3,000 in kiosk rent and purchased water from a local wholesaler at a price of $1.40 per gallon. If consumers were willing to pay $2.30 to purchase each gallon of fresh drinking water, how many units did she have to sell in order to turn an economic profit?

Answer 1

Economic profit considers both implicit and explicit costs.

Total fixed cost of operating a kiosk = Rant + forgone earnings of job

= $3,000 + $6,000 = $9,000 per month

Variable cost = $1.40 per gallon

Thus, the cost function is:

$C(Q) = 9,000 + 1.40Q$

The entrepreneur can earn profit when revenue exceed total costs of operating kiosk.

Total revenue > Total cost

$2.30Q > 9,000 + 1.40Q$

$2.30Q - 1.40Q > 9,000$

$0.9Q>9,000$

$Q>\frac{9000}{0.9}$

$Q>10,000$

This means entrepreneur did have to sell 10,000 units (gallons) in order to turn an economic profit.