Question

Peter is an architect who currently makes $15 a day in wages. He is considering leaving his job and opening a donut shop. The cost of producing donuts is $5 for the first donut and increases by $1 for each subsequent donut produced (i.e. the first donut costs $5 to produce, the second donut costs $6 to produce, the third donut costs $7 to produce, and so on). In addition, Peter must pay a daily cost of $5 to operate the shop, regardless of the amount of donuts he produces. Peter would be able to sell each donut for $10. If Peter only cares about his income, what should he do? Explain

Answer 1

Current salary = $15 per day Cost of producing donut = $5, %6, $7 Ellipsis Daily operation cost = $5 Price of donut = $10 When he produces 1 donut, Economic profit = (10 times 1) -(5 + 5) - 15 Economic profit = -15 When he produces 2 donuts, Economic profit = (10 times 2) - (5 + 6 + 5) - 15 Economic profit = -11 When he produces 3 donuts, Economic profit = (10 times 3) - (5 + 6 + 7 + 5) - 15 Economic profit = -8 When he produces 5 donuts, Economic profit = (10 times 5) - (5 + 6 + 7 + 8 + 9 + 5) - 15 Economic profit = -5 When he produces 7 donuts, Economic profit = (10 times 7) - (5 + 6 + 7 + 8 + 9 + 10 + 11 + 5) - 15 Economic profit = -6 Thus, it can be seen,