Economics Question
Redstone Clayworks, Inc., a small firm located in Sedona, manufactures clay fire pits that homeowners place on their patios for decoration and light-duty heating. Redstone is one of 53 firms worldwide supplying clay fire pits to retailers such as Home Depot, Lowe’s, Front Gate, and other upscale home product chains. Despite the best marketing efforts o these retailers to differentiate their individual brands of fire pits, consumers don’t care much about brands: A clay fire pit is a clay fire pit, regardless of who sells it. The following spreadsheet below provides data on Redstone’s costs of production.
| (1)
Q |
(2)
TC |
(3)
TFC |
(4)
TVC |
| 0 | 5,000 | 5,000 | 0 |
| 100 | 10,000 | 5,000 | 5,000 |
| 200 | 19,000 | 5,000 | 14,000 |
| 300 | 27,000 | 5,000 | 22,000 |
| 400 | 38,000 | 5,000 | 33,000 |
| 500 | 50,000 | 5,000 | 45,000 |
| 600 | 66,000 | 5,000 | 61,000 |
| 700 | 84,000 | 5,000 | 79,000 |
| 800 | 104,000 | 5,000 | 99,000 |
| 900 | 126,000 | 5,000 | 121,000 |
| 1,000 | 150,000 | 5,000 | 145,000 |
- a. Create a spreadsheet using Microsoft Excel (or any other spreadsheet software) that matches the one above by entering the output and cost data given above. Then use the appropriate formulas to create four new columns in your spreadsheet for average fixed cost (AFC), average variable cost (AVC), average total cost (ATC), and short-run marginal cost (SMC). [Computation check: At Q = 400: SMC = $110].
The world demand and supply curves for clay fire pits intersect at $190 per unit.
- b. Use the appropriate formulas to create two more columns in your spreadsheet for total revenue (TR) and marginal (MR). [At Q = 400: MR = $190].
- c. Use the appropriate formulas to create three more columns in your spreadsheet for profit (PROF), average profit (AVGPROF), and profit margin (PROFMARG). [ Computation check: At Q = 400: AVGPROF = $95].
- d. If Redstone’s manager wishes to minimize average total cost, how many clay fire pits should be produced? How many to maximize profit margin?
- e. Redstone’s manager is fired, and you are now the manager of Redstone Clayworks. How many fire pits would you choose to produce? Why?
- f. Now triple the total fixed costs to $15,000 in your spreadsheet. How does this change your production decision in part e? Explain briefly.
- g. Suppose a Congressional environmental panel announces that greenhouse gases from clay fire pits are contributing significantly to global warming. The announcement causes worldwide demand for fire pits to shrink substantially, and clay fire pit prices fall to $65 per unit. How does this change your production decision in part e? Explain briefly. [Note: Return total fixed cost to the original level of $5,000].
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