In the aftermath of a tornado in Albany, Georgia, Joe took a month-leave of absence (without pay) from his $7,500 per month employment in order to operate a kiosk that sold fresh drinking water. During the month of his operation, Joe paid $1,500 in kiosk rent and purchased water at a wholesale price of $1.25 per gallon.
(a) Write an equation that summarizes the cost function for his operation.
(b) If consumers are willing to pay $2.50 per gallon of drinking water, how many gallons of water must be sold in order to make a profit? Show your steps and calculations.
(c) Carefully discuss the relationships among marginal cost, average variable cost, average total cost and average fixed cost, when a firm could produce any level of output.