Three graduate business students are considering operating a fruit smoothie stand in the Harbor Springs, Michigan, resort area during their summer break. This is an alternative to summer employment with a local firm, where they would each earn $6,000 over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $1,000 for insurance and $3.20 per unit for materials and supplies. Their fruit smoothies would be priced at $5 per unit.
a. What is the accounting cost function for this business?
b. What is the economic cost function for this business?
c. What is the economic breakeven number of units for this operation? (Assume a $5 price and ignore interest costs associated with the timing of lease payments.)