Question

. Hoverboards and the Factory Market Area: Suppose there is a single shoe factory in the region. The factory competes with homemade shoes and will sell shoes to any household for which the net price of factory shoes is less than the cost of homemade shoes. The cost of a homemade shoe is the opportunity cost of the time required to make the shoe at home, that is, the one gallon of milk that could be produced instead. Suppose the higher cost of living and commuting requires compensation of 0.80 gallons of milk per hour. Each worker produces 10 shoes per hour, so the average labor and capital cost are 0.18 gallons of milk and 0.12 gallons of milk respectively. The factory price of shoe (equal to the average production cost, sum of the average labor cost and the average capital cost) is 0.30 gallons of milk. A round-trip mile involves one mile of travel to a location and one mile back, for a total distance of two miles. Linear travel cost 20 miles /hour. Therefore, the typical person takes 1/10 of an hour per round- trip mile. The changes are not cumulative.

a) Calculate the market area of the shoe factory. Draw the graph.
b) Suppose hoverboards decrease travel time for consumers from 1/10 per round-trip mile to 1/20 per round-trip mile. Illustrate the implications for the radius of the market area of the factory, including a value for the new radius. Draw the graph.
c) Suppose hoverboards also decrease the commuting cost of factory workers, decreasing the cost of urban living from 0.80 gallons to 0.30 gallons. Illustrate the effect on radius of the market area of the factory, including a value for the new radius. Draw the graph.

Answer 1