Question

Crepe Creations is considering franchising its unique brand of crepes to stall-holders on Hermoza Beach, which is five miles long. CC estimates that on an average day there are 1,000 sunbathers evenly spread along the beach and that each sunbather will buy one crepe per day provided that the price plus any disutility cost does not exceed $5. Each sunbather incurs a disutility cost of getting up from resting to get a crepe and returning to their beach spot of 25 cents for every 1/4 mile the sunbather has to walk to get to the CC stall. Each crepe costs $0.50 to make and CC incurs a $40 overhead cost per day to operate a stall. How many franchises should CC award given that it determines the prices the stall holders can charge and that it will have a profit-sharing royalty scheme with the stall holders? What will be the price of a crepe at each stall? Suppose now that CC requires that each stall holder deliver the crepes in its own designated territory. How many franchises should now be awarded if we make the standard assumption that the effort costs of the stall holders are the same as those of the sun bathers? How would your answer change if the the stall holders instead incurred effort costs half as much as those of the sun bathers, that is, if their costs were 12.5 cents for every quarter mile of distance?

Answer 1