Question

Suppose there is a single cheese factory in Wisconsin. The factory competes with homemade cheese, and will sell cheese to any household for which the net price of cheese is less than the production cost of homemade cheese. A homemade cheese takes an hour to produce for a consumer. Alternatively, she can produce a loaf of bread within an hour. The net price of a block of cheese produced at the factory is the factory price for the block of cheese, 1/6 loaves of bread, and the opportunity cost of travel to and from the factory to buy cheese. If a consumer travels to the factory to buy cheese, she bears a travel cost of 1/24 hour per round-trip mile: it takes 1/24 hour to complete a round-trip mile in each direction.

1. [2 points] What is the size of the market area of the cheese factory?

2. [2 points] Illustrate your answer.

Answer 1

1) The size of the market is the area of 0.5-mile radius circle.

2) In the data, it is mentioned that the consumer has a travel cost of 1/24hour per roundtrip of a mile. That means she has to travel 1 mile to go to the factory and come back to the home. It indicates that the factory is 0.5 miles away from the consumer.
If the time needed to travel is constant from the factory in each direction then the market area has a radius of 0.5-miles and it is a circle.