Assignment # 1

1. Starbucks is hoping to make use of its excess restaurant capacity in the evenings by
experimenting with selling beer and wine. It speculates that the only additional costs are hiring
more of the same sort of workers to cover the additional hours and costs of the new line of
beverages. What hidden costs might emerge?

2. BMC is considering upgrading the sound systems in their theaters so that they can
patrons can get the full experience from surround sound movies. They discovered that
upgrade costs at locations with 12 screens were $170,000 but were $110,000 at locations
with six screens. What are the fixed costs of upgrading at a location
3. Taco Casa is considering installing touch screen terminals for patrons to place their food
orders. They discovered that installation costs at stores with four screens were $60,000
but were $80,000 at stores with six terminals. What are the marginal costs of installing
another terminal at a location?
4. Taco Casa is considering installing touch screen terminals for patrons to place their food
orders. A terminal can typically accommodate the placement of 15 orders each hour while
a human can process 20 orders each hour. If employee costs are $7.50/hour in wages and
$4.50/hour in taxes, benefits and insurance, what is the per order opportunity cost of a
touch screen?
5. A business owner makes 50 items a day. She spends 8 hours in producing those items. If
hired elsewhere she could have earned $10 an hour. The item sells for $10 each.
Production occurs seven days a week. If the explicit costs total $10,000 a month the
economic profit for the month equals:
Questions 6-8
# Units Produced
0
1
2
3
4
5

Total Revenue
0
600
780
840
890
910

6. What is the marginal revenue from producing the third unit?

7. What is the average cost of producing three units?
8. What is the marginal cost of producing the third unit?

Total Costs
200
660
720
780
870
980

9. Cathy started her own line of custom made, hand embellished wedding shoes. She
opened up her own shop paid $2500 in fixed licensing fee. She used about $3000 in raw
materials and made $3500. At the end of the first month, Carly, her sister looked at her
financials and told her that she was losing money and should shut down. Cathy is
heartbroken. As an economics guru, what would you advise her to do?
a.

Cathy's costs consist pf just two components, the fixed licensing fee of $2500 and
her only overhead of raw materials of $3000. Since her income is $3500, she is
making a loss of $2000. Cathy will not be able to avoid the cost of raw materials as
they will be intrinsic in the generating her income. What she can do is eliminate the
licensing fee. She can sell her own hand made shoes through her own home or
garage or she can can sell her good through an independent distributor and pay the
distributor a a compensation. She then would not need a license to sell and the
distributor would do all the selling. Alternatively Cathy can also raise her price per
shoe sold to increase her total revenue and can also use her raw materials more
efficiently so that her revenue generated increases. Cathy should ideally increase the
quantity and/or the price of the shoes sold so as to increase her profitability.

10.
Raymond decides to set up a lemonade stand every weekend for the next four
weeks to save up for the latest x-men comic. He has to pay his brother Robert $10 as a
one-time payment for him to not bully Raymond or drive his customers away. The
lemons and sugar cost him $10 (the water is free) and his dad offers to set up his stall for
him. He ends up making $15 his first weekend. Frank, his father notices this and advises
Raymond to shut down the stall since he is making less than he is spending on the stall.
What would you advise Raymond to do