output changes. The rent for the campus store is a fixed cost, as Robert must
pay that rent irrespective of how many pizzas Robert sells.
Variable costs are not constant and do change with the level of output. Because
of this, variable expenses are often stated on a per unit basis. The variable cost
per pizza is $5. For every pizza Robert sells, Robert must spend $5.
Price is how much Robert gets per unit sold. The price here is $10, as that is how
much Robert gets for every pizza he sells.
Abhijit Guha

2Suppose we ask the question – assuming Robert sells 10 pizzas, how much profitdoes Robert make?
Suppose we ask the question – for Robert, what is break-even number of pizzas?
Intuition:
Roberts buys a pizza for $5 (VC), sells a pizza for $10 (PRICE), so Robert
makes $5 per pizza
Robert has incurred rent of $20 (FC) for the store, he must pay this no matter
how many pizzas he sells
If Robert sells 4 pizzas, he makes 4 x $5 = $20, and so he makes just enough
money to cover rent for the store
Hence the break-even quantity here is
4
Abhijit Guha

#### You've reached the end of your free preview.

Want to read both pages?

- Fall '12
- Worsham
- Marketing, Exercises