A new firm, PantryRoute, delivers boxes of local farm products to households. It operates from a rented warehouse and employs drivers only when customer ord...
Question 1 Report
A new firm, PantryRoute, delivers boxes of local farm products to households. It operates from a rented warehouse and employs drivers only when customer orders are received. In its first month, the firm earned total revenue of £36 000. Its costs included £9 000 warehouse rent, £12 000 for products bought from primary-sector farms, £6 000 driver wages and £3 000 for fuel. The founders are deciding whether to lower the delivery price to gain customers in a competitive market. They need to understand which costs change with output before making this decision.
(a) Define total revenue in the context of PantryRoute. [2]
(b) Which one of the following costs is most likely to be fixed in the short run: fuel, driver wages or warehouse rent? [1]
(c) Explain why a rise in the hourly wage rate of drivers is likely to reduce PantryRoute's profit, assuming its price and number of deliveries do not change. [3]
Answer Details
(a) Total revenue is the money PantryRoute receives from selling delivery boxes or delivery services. It is calculated as price multiplied by quantity sold. [2]
(b) Warehouse rent is most likely fixed in the short run. [1]
(c) Higher driver wages increase variable costs and therefore total costs. Total revenue is unchanged because both price and number of deliveries are unchanged. Since \(\text{profit}=\text{total revenue}-\text{total costs}\), profit falls. [3]
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