21 Jul WHAT IS MR. STAR BUCKS PROFIT MAXIMIZING QUANTITY?
Mr. Star Bucks is considering leaving his full-time job at a shoe company where he makes $2000 a mo Show more Mr. Star Bucks is considering leaving his full-time job at a shoe company where he makes $2000 a month and opening up a coffee shop on campus Assume that selling coffee is a perfectly competitive industry. If he opens the coffee shop he would have to quit his job and devote all the time he was previously working to his coffee business. In order to run the business Star will need a couple of things. He will need to rent a space for the coffee shop. The best deal he can find is a space that cost $4000 a month to rent. To get it he has to sign a year long lease. His lease stipulates that he can not sublet the space to someone else in the event that he does not use it. He will need to buy equipment: espresso machines coffee pots etc. He found some used equipment that will do and they are asking $20000 for the whole setup. He knows that this equipment will not depreciate. He is fortunate in that he will not have to take out a loan to pay for it. He can use his savings which currently is earning 2% interest per month. He will use hired workers to staff the shop and will pay them $7.25 per hour. Coffee beans are $7.50 per pound flavored syrup is $10 per gallon and coffee cups cost $0.10 each. Each cup of coffee takes 1/10 a pound of coffee beans and 1/50 of a gallon of syrup. He must stick to increments of 1000 cups of coffee. The table shows information for a typical month. Assume each month is identical. a. Fill in the missing cells in the production and cost table using the information above (use the larger delta midpoint method for the marginal cost). Total Revenue and Economic Profit will be filled in on part (c). b. Which input variable (or variables) exhibit the law of diminishing marginal productivity? Explain. c. If the price of a cup of coffee is currently $2.50 should Mr. Bucks enter the coffee industry? Assume that the market price of a cup of coffee will not change by him entering. d. At the price of $2.50 What is Mr. Star Bucks profit maximizing quantity? At this quantity what are Mr. Bucks variable costs? fixed costs? What is his accounting profit? What is his economic profit? e. Now suppose that Star Bucks has started his coffee shop. Things are going well for the first six months but then there is some supply shock which pushes the price of coffee beans to $14 a pound for the next two months. What action (if any) should Star Bucks take in the short term? What should he do longer term if the price of coffee beans doesnt go back down as promised? f. Suppose Star reads his lease over very carefully and discovers that in actuality he CAN sublet his shop on a month by month basis if he does not use it. Suppose he can sublet it for $3000 a month for any month he does not use his shop. How (and why) if at all would this change your answers in part e.? Show less
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