if the cost of plaster and labor were $5 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

To find the lowest price of gnomes at which there would be a positive supply in the long run, we need to calculate the total cost per gnome and then add a markup to cover the fixed costs (gnome molds cost). The total cost per gnome is $5 (plaster and labor) + $2.50 (overhead cost per gnome) = $7.50. To make a profit and cover the fixed costs, we need to add a markup, which can be calculated as follows:

Markup = (Target Profit + Fixed Costs) / (Units Sold)
Since the target profit is not specified in the problem, we can assume a small target profit of $1 per gnome. The fixed costs are $1,000 for the gnome molds. We need to find the units sold in the long run, which is equal to the total demand minus the annual decrease due to the loss of interest. From the problem, we know that the total demand is 10,000 gnomes and the annual decrease is 1,000 gnomes. Therefore, the units sold in the long run is 9,000 gnomes.

Markup = ($1,000 + $1) / (9,000) = $0.12 per gnome
Thus, the lowest price of gnomes at which there would be a positive supply in the long run is:
Price = Total Cost + Markup = $7.50 + $0.12 = $7.62
The closest answer choice to $7.62 is B) $7.20, which is the best choice.

If the Cost of Plaster and Labor Were $5 Per