Question

Leila runs a lawn mowing/maintenance service for busy homeowners. She has six potential customers and each is has a different maximum price they are willing to pay per week. The customers and the maximum price each is willing to pay each week is as follows:

Customer      Price
Lorraine      $40
Gilda            15
Jane            30
John            25
Bill            20
Dan            35

Leila's costs depend on the number of customers she has. Her costs (she has no sunk costs) appear in the following table:

# of customers per week            Total Cost
      1                  $22
      2                  $44
      3                  $66
      4                  $88
      5                  $110
      6                  $132

In Situation 7.3, Leila's optimal number of customers is

Select one:

a. 1

b. 4

c. 3

d. 5

Answer 1

Ans: 4

Explanation:

If price is $40, Leila can sell to only 1 customer. The Total revenue is $40 * 1 = $40. The total cost is $22. So, the total profit = TR - TC = 40 - 22 = $18.

If price is $35, Leila can sell to only 2 customer. The Total revenue is $35 * 2 = $70. The total cost is $44. So, the total profit = TR - TC = 70 - 44 = $26.

If price is $30, Leila can sell to only 3 customer. The Total revenue is $30 * 3 = $90. The total cost is $66. So, the total profit = TR - TC = 90 - 66 = $24.

If price is $25, Leila can sell to only 4 customer. The Total revenue is $25 * 4 = $100. The total cost is $88. So, the total profit = TR - TC = 100 - 88 = $12.

If price is $20, Leila can sell to only 5 customer. The Total revenue is $20 * 5 = $100. The total cost is $110. So, the total profit = TR - TC = 100 - 110 = -$10.

If price is $15, Leila can sell to only 6 customer. The Total revenue is $15 * 6 = $90. The total cost is $132. So, the total profit = TR - TC = 90 - 132 = -$42.

Thus, Leila can get positive profit when it serves 4 customers. Thus, the answer is [b].