if the cost of plaster and labor were $10 per gnome and everything else is as in the problem (gnome molds cost $1,000, interest rate is 10%), what is the lowest price of gnomes at which there would be a positive supply in the long run?

Question

Quizplus · Accepted Answer

At a cost of $10 per gnome, the total cost to produce 1,000 gnomes would be:
Cost per gnome x Number of gnomes = $10 x 1,000 = $10,000
Adding the fixed cost of the molds ($1,000), the total cost of production is $11,000. 
To break even, the gnomes must be sold for at least $11 each:
Break Even Point = Total Cost / Quantity = $11,000 / 1,000 = $11
Therefore, the lowest price of gnomes at which there would be a positive supply in the long run is slightly above the break-even point due to the presence of an interest rate on the initial investment. This means that the gnomes must be sold at a price higher than $11 to cover both the variable cost and a proportion of fixed cost. As such, option D ($12.20) is the best choice.

If the Cost of Plaster and Labor Were $10 Per