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a. Are raw almonds fixed cost or variable cost? How about processing and packaging? Maintenance? Overhead? Explain. b. Draw a typical firm's MC and ATC curves, and the market SRS (short-run supply) curves. c. The elasticity of demand for almond milk is-2/3 and the current market price is $7 and the market is at capacity. Derive a linear demand curve for almond milk (quantity and price).

a. Are raw almonds fixed cost or variable cost? How about processing and packaging? Maintenance? Overhead? Explain. b. Draw a typical firm's MC and ATC curves, and the market SRS (short-run supply) curves. c. The elasticity of demand for almond milk is-2/3 and the current market price is $7 and the market is at capacity. Derive a linear demand curve for almond milk (quantity and price).

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1. Almond milk is an approximately homogenous product. It is produced by finely grinding whole almonds and adding water. There are dozens of producers in the United States and as such it can be thought of as a perfectly competitive industry. Key costs include raw almonds, processing and packaging, maintenance and overhead. This industry has been growing and there are currently 70 factories producing almond milk. Suppose that all of these producers are identical: each is able to produce up to 3 million gallons of almond milk per year. The yearly maintenance and overhead for each factory is $7.5m and with proper maintenance this equipment can operate indefinitely; however, these factories have no alternative use, and their scrap value is zero. Raw almonds cost $1.40 per pound and a pound of almonds is needed to produce a gallon of almond milk. Processing and packaging a gallon of almond milk costs around $1.60. a. Are raw almonds fixed cost or variable cost? How about processing and packaging? Maintenance? Overhead? Explain. b. Draw a typical firm's MC and ATC curves, and the market SRS (short-run supply) curves. c. The elasticity of demand for almond milk is -2/3 and the current market price is $7 and the market is at capacity. Derive a linear demand curve for almond milk (quantity and price). d. What is the profit of each factory operating in the industry? e. To enter the market, it is necessary to open a food production facility and buy the necessary equipment. Given that entry is currently occurring, what can you infer about the price of a factory from the information above? Assume a 10% cost of capital. f. If the above market conditions are expected to persist and the cost of entry is $36m, how many more factories of the same type can be expected to open over the next few years? Before any entry takes place, and only the 70 original factories are operating, new research shows that the allergic effects of almonds are more severe than thought. As a result, at any price the quantity demanded is 30% lower than before. Suppose that entering and exiting this industry takes 9-12 months. g. What price do you expect to see in this market two months after the demand shock? Hint: Supply may not be at market capacity. h. What price do you expect to see in this market two years after the demand shock? i. How many factories are producing almond milk two years after the demand shock?
Transcribed Image Text:1. Almond milk is an approximately homogenous product. It is produced by finely grinding whole almonds and adding water. There are dozens of producers in the United States and as such it can be thought of as a perfectly competitive industry. Key costs include raw almonds, processing and packaging, maintenance and overhead. This industry has been growing and there are currently 70 factories producing almond milk. Suppose that all of these producers are identical: each is able to produce up to 3 million gallons of almond milk per year. The yearly maintenance and overhead for each factory is $7.5m and with proper maintenance this equipment can operate indefinitely; however, these factories have no alternative use, and their scrap value is zero. Raw almonds cost $1.40 per pound and a pound of almonds is needed to produce a gallon of almond milk. Processing and packaging a gallon of almond milk costs around $1.60. a. Are raw almonds fixed cost or variable cost? How about processing and packaging? Maintenance? Overhead? Explain. b. Draw a typical firm's MC and ATC curves, and the market SRS (short-run supply) curves. c. The elasticity of demand for almond milk is -2/3 and the current market price is $7 and the market is at capacity. Derive a linear demand curve for almond milk (quantity and price). d. What is the profit of each factory operating in the industry? e. To enter the market, it is necessary to open a food production facility and buy the necessary equipment. Given that entry is currently occurring, what can you infer about the price of a factory from the information above? Assume a 10% cost of capital. f. If the above market conditions are expected to persist and the cost of entry is $36m, how many more factories of the same type can be expected to open over the next few years? Before any entry takes place, and only the 70 original factories are operating, new research shows that the allergic effects of almonds are more severe than thought. As a result, at any price the quantity demanded is 30% lower than before. Suppose that entering and exiting this industry takes 9-12 months. g. What price do you expect to see in this market two months after the demand shock? Hint: Supply may not be at market capacity. h. What price do you expect to see in this market two years after the demand shock? i. How many factories are producing almond milk two years after the demand shock?
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