ECO-20044 - Economic Cost of Decisions - Resource Recs

ECO-20044 - Economic Cost of Decisions Competency In this project, you will demonstrate your mastery of the following competency: ● Determine the impact of economic costs on organizational and individual decision making Scenario You work for Orizont Consulting, an economic consulting firm. In casual conversation with your cousin Daniel, he mentioned that he’s weighing several decisions around his own small business, which is a coffee-roasting factory in his hometown. Given your line of work, he’s asked if you would be willing to do him a favor by bringing an economics perspective to his business. Business has been going very well for Daniel. The shop is always busy, and he’s recently hired two new temporary employees. However, he hasn’t seen much of an increase in profits. He’s looking for ways to maximize his profits, as he is considering quitting his job to run the business full-time. Directions Part 1: Letter and Financial Data After your conversation with Daniel, you’ve promised to look over his financial information and write him a letter with some recommendations. *Note that for this part of the project, you will submit both your letter (as a 250- to 300-word Microsoft Word document) and your completed Financial Data spreadsheet. 1. As your work on your recommendations for Daniel, assume that his business is in a perfectly competitive market. 2. Daniel has recently hired two temporary employees, but he isn’t sure if he has the right number of workers. To help Daniel calculate how many employees he needs, complete the Marginal Product of Labor tab in the Financial Data spreadsheet (located in the Deliverables section) and address the following: ○ Determine the marginal revenue product of labor for workers in the organization, given the wage rate. For each additional labor input Daniel adds, how much additional revenue does he get? ○ Determine how many workers Daniel should employ, explaining the impact of the marginal revenue product of labor on organizational decision making. ■ How many total worker should Daniel employ? ■ Why does an organization stop hiring workers? Make sure you explain the concept of diminishing return. 3. Daniel is considering the cost of running the business and whether or not he should quit his day job as a customer service specialist earning $45,000 annually. To help Daniel make this decision, answer the following:

○ Categorize the economic costs below as fixed or variable in the short run. Explain your rationale for each one and whether or not they will differ in the long run: ■ Rent ■ Wages ■ Raw materials ■ Energy costs ■ Phone and internet services ○ Complete the Daily Production Cost Schedule tab in the Financial Data spreadsheet to determine the annual profit/loss of Daniel’s business based on profit-maximizing production. Include the following in your response: ■ What is the annual profit/loss of Daniel’s business? ■ What is the profit-maximizing production level? Explain the process you followed to determine the profit-maximizing production level (quantity). ■ What would happen if Daniel produces above that amount? ○ Using your findings above, determine whether or not Daniel should quit his job as a customer service specialist, referencing the concepts of opportunity cost and economic profit. Assume Daniel operates his factory five days a week and works as a customer service specialist five days a week as well. Part 2: Email After reading your letter with your recommendations, Daniel has sent you an email expressing some concerns about the future state of his business. Recent events have made him think that the costs of running his business will increase. He has asked you to reply to his email and explain how he can manage his costs in the long run . Use microeconomics terms and concepts, and in your 250- to 300-word response, make sure you address the following scenarios that Daniel has sent you: ● I see that wages are going up and the price of machines is going down. What should I do in the future? Why? ● Other people are making more money than me in this industry, even though they have bigger operations. Why are they making more money if they have to pay more workers and buy more equipment? What to Submit Every project has a deliverable or deliverables, which are the files that must be submitted before your project can be assessed. For this project, you must submit the following: 1. Letter and Financial Data You’ve promised to look over Daniel’s financial information and give him recommendations about some important decisions he will need to make regarding his business and personal life. You will submit a 250- to 300-word letter with your recommendations, as a Microsoft Word document, and the completed Financial Data spreadsheet to support your recommendations. 2. Email After reading your letter, Daniel wants some advice regarding the future state of his business and how he can manage costs. You will respond to his email in 250–300 words, analyzing the scenarios he sent you.

Categorizes economic costs as fixed or variable in the short run, explaining whether or not they will differ in the long run Economic Profit vs Accounting Profit (8:05) This video from Khan Academy explains in detail the difference between economic profit and accounting profit. As you watch, consider why this distinction is important to organizational decision making and managing costs. Maximizing Profit Under Competition (13:16) This video from Marginal Revolution University shows how to determine the profit-maximizing production level (quantity) for a firm in a competitive environment. It explains the differences between fixed and variable costs and how they influence how firms maximize their profits. The video also shows how to calculate total revenue and total cost. Maximizing Profit and the Average Cost Curve (12:18) In this video, Alex Tabarrok from Marginal Revolution University introduces the concept of average cost and shows how firms use the average cost curve to predict profit, minimize losses, and make entry/exit decisions. ● Marginal Revenue and Marginal Cost (6:09) ● Marginal Revenue Below Average Total Cost (5:54) These videos from Khan Academy discuss marginal revenue and marginal cost and how these can be used to make output decisions and calculate profit in perfectly competitive firms. As you watch these videos, think of what would happen if firms produced above their profit-maximizing production level. How Perfectly Competitive Firms Make Output Decisions As price takers, firms in perfect competition can only decide what quantity to produce to maximize their profits. This reading from Khan Academy explains how firms make these output decisions based on the total revenue and total cost curves. Determines the annual profit/loss of an organization based on profit- maximizing production Applies the concepts of opportunity cost and economic profit to decision making Tradeoffs and Opportunity Costs (3:52) Watch 1:53 to 5:42 of this video to learn about the economic concepts of opportunity costs and tradeoffs. ● The Demand Curve (3:31) ● The Supply Curve (2:55) ● Supply and Demand Terminology (3:55) These videos briefly explain the demand and supply curves, which are graphical representations of how much of a product people are willing to buy (demand) and how much of a good producers will supply as the product’s price changes. As you watch, think of the factors that influence the demand and supply curves. Email Explains how firms can manage their costs in the long run, using microeconomics terms and concepts ● Entry, Exit, and Supply Curves: Increasing Costs (6:33) ● Entry, Exit, and Supply Curves: Constant Costs (10:29) ● Entry, Exit, and Supply Curves: Decreasing Costs (6:02)

These videos explain how firms’ decisions impact the supply curve. They also show the impact an increase on output has on costs by explaining three different cost structures in the long run: increasing, constant, and decreasing costs. As you watch these videos, consider how expansion and contraction of an industry impact costs, as well as entry and exit to a market. The Structure of Costs in the Long Run This reading from Khan Academy discusses how costs differ in the long run from the short run and how firms make decisions regarding their production methods in order to have an optimal combination of labor and capital. The reading also explains the concept of economies of scale, which is when the average costs decreases as the production level increases. As you read, consider why costs become variable in the long run. General Written answers are clear; use correct grammar, sentence structure, and spelling; and show an understanding of audience and purpose Grammarly - free spelling/grammar checker (10/10 recommend) Writing Resources (AdvanceEDU Recommendations) Academic Support on Brightspace Lists sources where applicable using citation methods with no major errors Citation Help Need help citing your sources? Use the CfA Citation Guide