Paul is considering opening a book club in New York City. The monthly cost includes a facility fee, rent, and wages. Also, he needs to invest $30,000 initially on a total of 5,000 books and $10,000 on the furniture. To decide how much he should charge on every book rented, he did an online survey with a random size of 500 people. After receiving the responses, he categorized them into three groups based on their income level. The final result is as follows:
Price Willing to Pay (marginal value of books) Number of books
|
read (per month)
|
Low
|
Medium
|
High
|
|
1
|
2.00
|
2.50
|
3.35
|
|
2
|
1.50
|
2.01
|
2.56
|
|
3
|
1.20
|
1.52
|
2.45
|
|
4
|
1.02
|
1.33
|
2.01
|
|
5
|
0.92
|
1.03
|
1.34
|
|
6
|
0.89
|
0.95
|
1.03
|
|
7
|
0.80
|
0.76
|
1.02
|
|
8
|
0.63
|
0.60
|
0.98
|
|
9
|
0.42
|
0.26
|
0.87
|
|
10
|
0.25
|
0.22
|
0.79
|
Assume that books depreciate over one year and the furniture depreciates over five years.
a. What should the rent for each book be?
b. Given the fixed cost for each month in the table below, should Paul open the book club? Why?
Fixed Cost ($)
|
Rent
|
Facility
|
Wage
|
|
1,000
|
200
|
512
|