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Suppose a factory can produce a shirt for the equivalent cost of 2 loaves of bread, and a household can produce a shirt for the equivalent cost of 6 loaves of bread. The factory is located in a rural area with a uniform population density. It costs the equivalent of 1 loaf of bread for a household to make a one mile round-trip to and from the factory.

a. Assuming zero profit (the consumer pays the factory's cost of production only), what will be the radius of the factory's market area?

b. Now suppose the factory develops an innovation that allows it to produce a shirt for the equivalent of 1 loaf of bread. What is the new radius of the factory's market area.

Microeconomics, Economics

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