An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that average total costs per pack of dough would be $7, of which variable costs per pack would be $5.
An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs.
Should the entrepreneur start the new business?
A) The entrepreneur should start the new business ONLY if customers are willing to pay at least $1 more for the new dough than for the incumbent's dough, so the entrepreneur can make some profit and grow the business.
B) The entrepreneur should start the new business as long as customers are willing to pay at least as much for his cookie dough as for the incumbent’s product.
C) The entrepreneur should definitely start the new business because his variable cost per pack of dough is already lower than that of the incumbent bakery.
D) The entrepreneur must be indifferent to starting the business because his average cost per pack is equal to his established rival’s variable cost per pack.

Question

09-03-2020
Business

contestada

An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that average total costs per pack of dough would be $7, of which variable costs per pack would be $5.
An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs.
Should the entrepreneur start the new business?
A) The entrepreneur should start the new business ONLY if customers are willing to pay at least $1 more for the new dough than for the incumbent's dough, so the entrepreneur can make some profit and grow the business.
B) The entrepreneur should start the new business as long as customers are willing to pay at least as much for his cookie dough as for the incumbent’s product.
C) The entrepreneur should definitely start the new business because his variable cost per pack of dough is already lower than that of the incumbent bakery.
D) The entrepreneur must be indifferent to starting the business because his average cost per pack is equal to his established rival’s variable cost per pack.

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jepessoa jepessoa · Answer 1 · 2020-03-14T03:49:38+01:00

Answer:

C) The entrepreneur should definitely start the new business because his variable cost per pack of dough is already lower than that of the incumbent bakery.

Explanation:

The entrepreneur's average cost ($7) is equal to the incumbent bakery' variable cost ($7). As long as the customers are willing to pay at least $7 for the entrepreneurs cookie dough, he should start his business. This way marginal revenue ($7) = marginal costs ($7).