A pizzeria, which operates in a perfectly competitive hospitality market, can produce pizzas if it has its premises and a pizza oven (which cost £10 per night), ingredients (£3 per pizza), and workers (each of whom earn £40 per night). The number of pizzas that can be produced per night, depending on the number of workers employed by the pizzeria, is given in the following table: Workers employed 1 2 3 4 5 Pizzas per night 20 36 48 56 60 HINT: In the following, you will be asked to draw curves in diagrams based on the above table. In each diagram, please proceed as follows: First, place a dot in the diagram, each representing a column in the table. Second, label each dot with its coordinates. Third, connect dots with straight lines to obtain the required curve. a) Draw the production function as number of pizzas per night depending on the number of workers employed. b) Briefly describe the shape of your production function and explain the reasons for this shape. c) Draw the total cost function. d) Explain how the firm can use this cost function to determine its profit maximising quantity. e) Determine the firm’s profit maximising quantity if the market price is £6, showing how you applied the method that you explained in your answer to (d) to get the result. f) Determine the firm’s optimal profit if the market price is £6.
A pizzeria, which operates in a
market, can produce pizzas if it has its premises and a pizza oven (which cost £10 per night),
ingredients (£3 per pizza), and workers (each of whom earn £40 per night). The number of pizzas
that can be produced per night, depending on the number of workers employed by the pizzeria, is
given in the following table:
Workers employed 1 2 3 4 5
Pizzas per night 20 36 48 56 60
HINT: In the following, you will be asked to draw curves in diagrams based on the above table. In
each diagram, please proceed as follows: First, place a dot in the diagram, each representing a
column in the table. Second, label each dot with its coordinates. Third, connect dots with straight
lines to obtain the required curve.
a) Draw the production function as number of pizzas per night depending on the number of
workers employed.
b) Briefly describe the shape of your production function and explain the reasons for this
shape.
c) Draw the total cost function.
d) Explain how the firm can use this cost function to determine its profit maximising quantity.
e) Determine the firm’s profit maximising quantity if the market price is £6, showing how you
applied the method that you explained in your answer to (d) to get the result.
f) Determine the firm’s optimal profit if the market price is £6.
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