Amy wants to open a coffee shop and has already rented a coffee retail space on Bloor Street, signing a lease for three months, which includes her expresso-making equipment. The rent is $900 per week and the wage for barristas is $16 per hour. Amy can legally keep her shop open up to 100 hours a week. The number of expresso drinks q Amy’s barristas can make in an hour given the capital on hand, and assuming she doesn’t run out of beans or cups, is given by q = 15L.5 where L is the number of barristas currently working. Amy can provide 50 hours of barrista labor herself instead of hiring a worker if she wants to reduce labor costs, and she could also work 50 hours a week running the coffee shop across the street for $25 an hour. The typical price of an expresso drink is $7, which Amy takes as given since there are many other coffee shops in the neighborhood. The cost of the materials M (cups, beans, and milk) that go into each drink sold is $2.50, and Amy’s coffee bean and cups provider will fill any order she makes within a day. (a) What are Amy’s marginal cost, average cost, average variable cost, and average fixed cost functions? (b) Should Amy produce in the short run? Why? (c) Should Amy produce in the long run? Why?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Amy wants to open a coffee shop and has already rented a coffee retail space on Bloor Street, signing a lease for three months, which includes her expresso-making equipment. The rent is $900 per week and the wage for barristas is $16 per hour. Amy can legally keep her shop open up to 100 hours a week. The number of expresso drinks q Amy’s barristas can make in an hour given the capital on hand, and assuming she doesn’t run out of beans or cups, is given by q = 15L.5 where L is the number of barristas currently working. Amy can provide 50 hours of barrista labor herself instead of hiring a worker if she wants to reduce labor costs, and she could also work 50 hours a week running the coffee shop across the street for $25 an hour. The typical price of an expresso drink is $7, which Amy takes as given since there are many other coffee shops in the neighborhood. The cost of the materials M (cups, beans, and milk) that go into each drink sold is $2.50, and Amy’s coffee bean and cups provider will fill any order she makes within a day. (a) What are Amy’s marginal cost, average cost, average variable cost, and average fixed cost functions? (b) Should Amy produce in the short run? Why? (c) Should Amy produce in the long run? Why?

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