Question

4. Red Osier runs a seafood and steak restaurant in Stafford and also operates a food truck at fairs and festivals across the region. In considering a festival in Brockport to occur the weekend of October 21, Red Osier learns that it will have to pay a site fee of $3000 to the festival organizers for a standard site for the weekend. Based upon past experience at the festival, it estimates that it could expect sales of $12,000 over the weekend while incurring $5000 in costs for supplies and labor. Facing the entry deadline, Red Osier pays the non- refundable $3000 site fee on October 7. On Thursday, October 20, the weather forecast for the weekend predicts raw and blustery weather. Red Osier estimates this would result in weekend sales dropping to $6000 with the cost of food and supplies now coming in at $4000. Consider the decision to be made by Red Osier the Thursday before the festival. They could operate their food track at the festival despite the weather forecast or they could decide not to send the food truck out for the weekend._What is the marginal cost and what is the marginal benefit of operating the food truck at the Brockport festival at this point? Is the rational,profit maximizing decision to operate the food truck at the festival or to not participate in the festival? Explain.

Answer 1

Solution

As mentioned above,there are 2 choices that Red Osier can take.It should choose the best option.So,we will evaluate the best option among the available 2 options:

Operating at the Brock port festival (weather is normal) - (Maximum Potential )

Site Fee (Refundable) =  $3000 ; Cost for supplies and labor =$5000 ; Expected Revenue = $12,000

Therefore,the total expected profit becomes $4,000

Option 1 - Operating at the Brock port festival (weather is improper)

Site Fee (Refundable) =  $3000 ; Cost for supplies and labor =$4000 ; Expected Revenue = $6,000

Therefore,the total expected / potential profit becomes - $1000 (i.e., a loss of $1000)

Option 2 - Not Operating at the Brock port festival

Site Fee (Refundable) =  $0 ; Cost for supplies and labor =$0 ; Expected Revenue = $0

There will be no loss (or) profit so this option 2 is the economically better option.

If the probability of prediction becoming true is same as that of becoming false then:

Expected utility if they operate the food truck is [(0.5) * (4000) + (0.5) * (-1000)]

i.e., $2,000 - $500 which is equal to $1500

Expected utility when not operating would be $0 , so ultimately they will have to choose option 1.

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