PART I.
Use what you’ve learned about production/costs and perfect competition to answer a few questions about a yogurt business.
The details of your circumstances :
- You have already paid for 1 month’s rent ($3000) and your commercial property landlord is allowing you to lease the space on a month- to- month basis. There are 30 days this month.
- You own three frozen yogurt machines already and a commercial-grade refrigerator/freezer (they were gifts from your rich uncle who just wants you to succeed).
- You observe that the cost of the yogurt mix, cones, cups and sprinkles and the imputed cost of utilities cost you $0.50/cup.
- You have already paid the first month’s lease. Today is the start of the month.
- You can only hire labor for the entire day (ie, 8 hours/day shifts and the daily salary is $80/worker)
Also, labor can generate the following output(s):
| Labor (# of employees hired)/day | Output Produced/day |
| 0 | 0 |
| 1 | 100 |
| 2 | 190 |
| 3 | 260 |
| 4 | 290 |
| 5 | 310 |
| 6 | 320 |
QUESTION 1 ) The name of your business (I love creativity) AND more importantly (2) state the quantities of frozen yogurt you would willingly supply to the market at each of the following (specific) prices given that you can only hire labor for the entire day (ie, 8 hours/day shifts and the daily salary is $80/worker). You have already paid the first month’s lease. Today is the start of the month.
| Price | Quantity Supplied Per Diem (Your Responses) |
| $1.00 | |
| $1.30 | |
| $1.39 | |
| $1.50 | |
| $1.64 | |
| $1.85 | |
| $2.00 | |
| $2.25 | |
| $2.50 | |
| 3.16 | |
| 4.50 |
II. Please complete the following table. Here, it is embedded as an image, but to make it easy for you, the Excel formatted file is added as an attachment at the bottom of this post.
(1) What are the fixed inputs? Fixed Costs (on a per diem basis)
(2) What are the variable inputs? Variable Costs (on a per diem basis)
(3) What is the marginal product of the first worker? the second worker? the third worker? Why does marginal product decline as the number of workers increases
(4) calculate the average variable cost at each DISCRETE output opportunity (ie, 100, 190, 260, and not 1, 2, 3, 4, please) and IDENTIFY THE MINIMUM AVC
(5) calculate the average total cost at each DISCRETE output opportunity (ie, 100, 190, 260, and not 1, 2, 3, 4, please) and IDENTIFY THE MINIMUM ATC
6) Based on the economics you’ve learned so far, should you stay in business in the short run? WHY? In the short run, the rent was a sunk cost so you did not consider that for profit maximization. You either chose to provide quantities to the market OR you chose to shut down. That’s it. Simple.
7) Based on the economics you’ve learned so far, should you stay in business in the long run? For long run consideration, you do need to consider the fixed costs/sunk costs. Sunk costs are no longer irrelevant.
Will you renew your lease after the first 30 days are expired? WHY? If you stay in business in the long run, what could you do to enhance your chances for business success (ie, profits?)
Is there anything you can do? (ie, In LA county, restaurants and food establishments are required to post hygiene grade cards on their windows. Diners chose not only to eat at more hygienic establishments but establishments also responded to this incentive by improving their food safety practices. Can you clean your way to better success? Will the effort add to your costs? Explain. )
8) One of your customers left today’s newspaper on the table for you to recycle. There on the page, you see a large print ad for Delta Airlines. It shows a picture of a couple relaxing at an exotic location and a slogan, “Who says a dollar doesn’t go as far as it used to? Up to 75,000 miles per trip with the new Skymiles Program!” You conclude that what’s good for the goose could be good for the gander so you contemplate advertising. Of course, the effect of advertising for DELTA AIRLINES (an oligopoly) means that a successful ad campaign would move their demand curve to the RIGHT and it would also make their demand curve MORE INELASTIC. After all, advertising is meant to build brand LOYALTY so that customers will stick with you even if you raise prices.
Will this also work for you? Why or why not?
Are you in a perfectly competitive market? Provide the assumptions to define a perfectly competitive market? Do you meet all these criteria?
Or, do you think you are in an imperfectly competitive market?
If you believe you are in a perfectly competitive market, would an ad campaign affect you? Why or why not?
If you believe you are operating under an imperfectly competitive market, might advertising allow you to steal customers from rivals?
8) Calculate Marginal Cost at each of the discreet output opportunities (there are only 7).
9) What is the profit maximizing level of output, currently, given that price is $1.65. What decision rule did you use to make this choice?
10) Are you currently in the “long run”? What do you expect the price to be when you do reach the “long run”?