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Santiago runs a comic book store in the town of East Arbor. He is debating whether he should...

Question:

Santiago runs a comic book store in the town of East Arbor. He is debating whether he should extend his hours of operation. Santiago figures that his sales revenue will depend on the number of hours the store is open as shown in the table. He would have to hire a worker for those hours at a wage rate of $18 per hour.

Hours Open Total Revenue (dollars)
1 70
2 120
3 160
4 184
5 100
6 210

Using marginal analysis, determine how many hours Santiago should extend his store's hours of operations:

A. 2 hours

B. 3 hours

C. 4 hours

D. 5 hours

E. 6 hours

Answer and Explanation:

The answer is C.

The determine how many hours to open, the store compares the marginal revenue product of opening an additional hour against the cost of opening an additional. The store should open for an additional hour as long as the marginal revenue is higher than the marginal cost. The following table shows that the marginal revenue. The marginal cost is the hourly wage that the store has to pay for a worker, which is $18.

Hours Open Total Revenue (dollars) Marginal Revenue
1 70 -
2 120 50
3 160 40
4 184 24
5 100 -84
6 210 110

Based on the table above, the store should open for 4 hours, where the marginal is $24, which is the higher than the marginal cost. If the store opens for 5 hours, the marginal revenue would be lower than the marginal cost, which is not profitable.


Learn more about this topic:

Profit Maximization: Definition, Equation & Theory

from Intro to Business: Help and Review

Chapter 24 / Lesson 6
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