Question #2:

You own a property on Main Street on which a small, vacanttake-out pizza stand sits.  

There are other vacant take-out pizza stands in the same locale(i.e. Main Street) as well as on the less busy Side Streetlocale.   From your market analysis, you are confidentthat the sites will attract the following number of pizza saleseach month (based on their locale):

Main Street: 450

Side Street:   300

The market price for pizzas in the city is $7.00. You know thecost of running and maintaining a pizza stand (paid by the operatorof the business of course) is fixed at $900 per month.

Jobs in another industry which pay $200.00 per month areplentiful in the city and therefore $200.00 is theminimum profit after rent operators must achieve inorder for them to run a pizza stand.

Note: If any new assumptions are made, they will continue tobe in effect for subsequent questions.

A. What is a potential operator’s monthlyprofit, before rent, at each of the two locales (Main Street andSide Street)?

Explain with the help of a table.

B. You learn that the Side Street propertiesare renting for $250 per month on a month-to-month basis. Assumeoperators can easily (and at no cost) switch from one property toanother.

Given that operators can easily setup shop at a Side Streetlocation for $250 per month, how much rent are you able to collectfor your Main Street property? Why? Show your work with the help ofa table.

C. Seeing how much profit there is to be madein the pizza business (compared to the alternative industry which,as a reminder, pays just $200 per month), would-be pizza standoperators rush to open up new businesses.

With far more be operators in the market than propertiesavailable for them, what will the rent for each properties in eachof the locales (Main Street and Side Street) eventuallystabilize at? Why? Show your work with the help of atable.

D. A local business owner is interested inconverting your Main Street pizza stand site into a tanning salon(at no cost to you). The cost of operating the tanning salon isjust $400.00. They are confident they’ll attract 80 tanningsessions per month at $25.00 per session.

Will we see a new tanning salon on your site? Why or why not?Show with the help of a table.

E. The evening news reports that demand forpizza is surging in your market. Experts predict that the number ofpizzas a Main Street location can sell will double to 900 per monthand prices will increase to $10.00 per pizza.

“With monthly profits expected to increase so dramatically, thisis a GREAT time to be in the pizza business!” the reporterconcludes.

Will the pizza operators at Main Street locationsreally keep that additional residual profit? Explain whyor why not. What business is it really a GREAT time to bein? :-)