Question

6. Suppose there are a highway road, and lots for factory. Freight cost occur 1 for 1 unit of product per 1km from the highway road and 0 after it reaches to the road. A firm needs 10 for hiring enough number of workers and there is no other non-land cost. The price of the bicycle is 5, and the quantity demanded is 5. Derive the market value of a location which is 3km far from the highway road.

A. 25

B. 15

C. 12

D. 5

E. 0

Answer 1

Option (E) is correct.

Explanation:

A highway road is given which has many factories.

Freight cost for 1 unit of product is 1 per km from the highway and 0 after it reaches the highway road.

The quantity demanded of bicycle is 5. So, if a factory produces and delivers 5 bicycles, the total freight cost would be 15 ( 5 bicycles * 3 km) for a factory location which is 3 km far from the highway road. The firm needs amount of 10 to hire enough number of workers to produce 5 bicycles. Thus, the labor cost is 10. There is no other non-land cost for this factory.

Thus, Total costs = Freight cost + labor cost

= 15 + 10

= 25

Now, the price of 1 bicycle is 5 and quantity demanded is also 5.

Thus, total revenue = Price * quantity

= 5*5

= 25