Problem 2: Essay Sample

Problem 1:

Q1. The cost of the four ovens is a fixed cost. The addition of more employees does not change the cost of the ovens. The cost of the ovens is $1000. The cost of the workers is a variable cost because it is determined by the number of workers that are available in a given period. Each worker is paid $500 per week, but the pizza shop employs different numbers of workers.
There is an increasing rate of return from the range of 0-5 employees that are hired by the pizza shop. There is a diminishing rate of return from the range of 5-8 employees that are hired. The law of diminishing returns is shown in this case where the addition of more employees leads to the rise of production up to a certain point where it starts to decline.
Q2. 6 workers are more efficient in terms of pizza production because they produce the highest number of pizza per person. At an employment level of 6 workers, each employee produces 190 pizzas. The table below demonstrates this scenario.
Q3. The number of workers that minimizes the marginal cost in the production of pizza is 5. The marginal cost is 1.67 as shown in the table below.
Q4. Marginal productivity would decline after you hire additional employees after a certain level because the productivity of the additional employees becomes less (Douglas, 2012). The further increase of the workers increases the marginal cost and moves further away from the optimal level. It is advisable to hire the correct number of employees that would ensure productive efficiency.
Q5. Expansion of the business would affect the economies of scale through the minimization of production costs. The expansion of the pizza shop would lead to specialization of employees so as to enable efficient utilization of the resources. The workers will acquire great skills by specializing in specific tasks (Douglas, 2012). The pizza shop will also enjoy reduced prices by buying in bulk from suppliers.
The pizza shop would have diseconomies of scale when there are too many employees. Excess employees lead to inefficient communication in the work place, and this affects production. The morale of the employees will also go down and affect the performance of the individual employees.

Q1. MC = ΔTVC/ΔQ
TVC = 3450+20Q+0.008Q2
MC = 20+0.016Q
The expression for the MC curve is given by the function MC = 20+0.016Q

The marginal cost (MC) function for a curve is derived by differentiating the Total Variable Cost (TVC).

Q2. The MC before the increment of the output is given by the function
MC = 20+0.016Q
= 20+(0.016x1000)
= 36

The MC after the increment of the output is given by the function

MC = 20+0.016Q
= 20+(0.016x1200)
= 39.2
The incremental MC = 39.2 – 36
= 3.2

There is also the additional cost of leasing which is $2000

Q3. Profit maximizing price and output levels
Remember: Q = 4100 – 25P and MC = 20+0.016Q
P = MC
P = 20 + 0.016Q
P = 20 + 0.016(4100 - 25P)
P = 20 + 65.6 - 0.4P
1.4P = 85.6
P = $61.14

The profit maximization price is $61.14

The output level that should be produced by Paradise Shoes so as to maximize profit is given below:
Q = 4100 – 25P
= 4100 – (25x61.14)
= 4100 – 1528.5
= 2571 pairs of shoes per week
Paradise Shoes needs to expand its output so as to produce more than 1200 pairs of shoes per week. The results shown by the output level indicates that Paradise Shoes is producing below its profit maximization level. The company can still make profits by producing 2571 pairs of shoes in a week. The high demand for the shoes will enable the company to sell more shoes. The company needs to expand its output so as to make optimum use of the available resources and meet the customer demand.

References

Douglas, E. J. (2012). Managerial Economics. San Diego, CA: Bridgepoint Education, Inc.