Question
Costs and Cost Minimizing Output
In this Assignment, you will analyze fixed and variable costs of a small business. You will also evaluate optimal quantity of output that minimizes costs and maximizes profits.
In this Assignment, you will be assessed on the following outcome:
GEL-1.1: Demonstrate college–level communication through the composition of original materials in Standard American English.
Assignment:
Before answering the following questions, review the Assignment Checklist. Then, in a separate Word document, write a 1–2 page expository research paper answer the following questions based on the rule for minimizing costs of production in regard to a small business plan to minimize costs in order to increase productivity and maximize profits:
1. Pat’s Pizza Restaurant owner incurs various economic costs of production. Explain whether each of the following is an explicit cost or an implicit cost. Which of the two costs should Pat minimize to maximize his account profit?
Payments for rented manufacturing equipment.
A firm’s use of a warehouse that it owns and could rent to another firm.
Wages paid to the firm’s workers.
The wages the firm’s owner could earn if he/she worked for another company.
Consider the following information in the table for Pat’s Pizza Restaurant and answer the questions below by using the cost minimization rule that takes into account the marginal product per dollar of inputs of production.
| Marginal Product of Capital | 4,000 |
| Marginal Produce of Labor | 100 |
| Wage Rate | $10 |
| Rental Price of Pizza Ovens | $500 |
Is the owner of Pat’s Pizza Restaurant minimizing costs? Explain using the data in the table.
Should he rent more ovens and hire fewer workers or rent fewer ovens and hire more workers to increase productivity and lower costs of production?
Consider Pat’s Pizza Restaurant’s production decision in both the short-run and long–run. Pat wants to improve the productivity of the firm in the long run. Explain the types of input costs that might be fixed in the short–run and types of costs that may be variable in the long–run. Provide examples for fixed inputs and variable inputs as well as fixed costs and variable costs for the Restaurant in the short run. What long run economic decisions should Pat make to increase productivity, minimize costs, and maximize profit?
Sample paper
Costs and Cost Minimizing Output
Impacts of a Borderless Society
1. Pat’s Pizza Restaurant owner incurs various economic costs of production. Explain whether each of the following is an explicit cost or an implicit cost. Which of the two costs should Pat minimize to maximize his account profit?
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Payments for rented manufacturing equipment.
This is an explicit cost. Explicit costs represent those payments that a firm or a business makes to others during its operations (Tucker, 2008). In this case, Pat’s Pizza Restaurant makes payments for rented manufacturing equipment.
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A firm’s use of a warehouse that it owns and could rent to another firm.
This is an implicit cost. The implicit costs is the opportunity costs that a firm foregoes in utilizing a particular factor of production it owns, instead of for instance, renting it out. (Tucker, 2008). It this example, the firm uses the warehouse instead of renting it out, thus missing rent income.
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Wages paid to the firm’s workers.
These are explicit costs. This is because they are costs that are directly incurred by the firm.
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The wages the firm’s owner could earn if he/she worked for another company.
This is an implicit cost. This is because it represents an opportunity cost that the owner misses by deciding to work on the firm and not another company.
2. Consider the following information in the table for Pat’s Pizza Restaurant and answer the questions below by using the cost minimization rule that takes into account the marginal product per dollar of inputs of production.
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Marginal Product of Capital 4,000 Marginal Produce of Labor 100 Wage Rate $10 Rental Price of Pizza Ovens $500
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Is the owner of Pat’s Pizza Restaurant minimizing costs? Explain using the data in the table.
The owner is not minimizing costs, because the ratio of marginal product of labor is not equal to that of marginal product of capital. For every additional unit of labor, the output increases by 10 units (100/10). On the other hand, for every additional unit of capital, the output increases by 8 units (4,000/500).
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Should he rent more ovens and hire fewer workers or rent fewer ovens and hire more workers to increase productivity and lower costs of production? Explain.
The owner should rent fewer ovens and hire more workers to increase productivity. Cost minimization occurs when ratio of marginal products equals ration of input prices (Lipsey & Chrystal, 2015). As such, 100/4000 should equal 10/500. This can be achieved by increasing workers and reducing the number of ovens.
3. Consider Pat’s Pizza Restaurant’s production decision in both the short-run and long–run. Pat wants to improve the productivity of the firm in the long run. Explain the types of input costs that might be fixed in the short–run and types of costs that may be variable in the long–run. Provide examples for fixed inputs and variable inputs as well as fixed costs and variable costs for the Restaurant in the short run. What long run economic decisions should Pat make to increase productivity, minimize costs, and maximize profit?
Fixed costs
Fixed costs are those that do not change or vary with the level of output in the short run. In the long run, all costs become variable. The input costs that might be fixed in the short run include rental charges, cost of capital, land, and entrepreneurship. In the long run, all these costs may become variable. For instance, the restaurant may see the need to acquire more land in order to expand operations. In the short run, the variable costs are wages and cost of raw materials. These change or vary depending on the level of output. The long run decision that Pat should make is to increase labor and production equipment or the ovens.
References
Lipsey, R., & Chrystal, A. (2015). Economics. Oxford: Oxford University Press.
Tucker, I. B. (2008). Survey of economics. Mason, OH: South-Western Cengage Learning.
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