## Production Cost Analysis and Estimation Applied Problems

## Production Cost Analysis and Estimation Applied Problems

Production Cost Analysis and Estimation

Applied Problems

Please complete the following two applied problems:

Problem 1:

William is the owner of a small pizza shop and is thinking of increasing

products and lowering costs. Williamâs pizza shop owns four ovens and the cost

of the four ovens is $1,000. Each worker is paid $500 per week.

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Show all of your calculations and processes. Describe your answer for each

question in complete sentences, whenever it is necessary.

Which inputs are fixed and which are variable in the

production function of Williamâs pizza shop? Over what ranges do there

appear to be increasing, constant, and/or diminishing returns to the

number of workers employed?

What number of workers appears to be most efficient in

terms of pizza product per worker?

What number of workers appears to minimize the marginal

cost of pizza production assuming that each pizza worker is paid $500 per

week?

Why would marginal productivity decline when you hire

more workers in the short run after a certain level?

How would expanding the business affect the economies

of scale? When would you have constant returns to scale or diseconomies of

scale? Describe your answer.

Problem 2:

The Paradise Shoes Company has estimated its weekly TVC function from data

collected over the past several months, as TVC = 3450 + 20Q + 0.008Q2 where TVC

represents the total variable cost and Q represents pairs of shoes produced per

week. And its demand equation is Q = 4100 â 25P. The company is currently

producing 1,000 pairs of shoes weekly and is considering expanding its output

to 1,200 pairs of shoes weekly. To do this, it will have to lease another

shoe-making machine ($2,000 per week fixed payment until the lease period

ends).

Show all of your calculations and processes. Describe your answer for each item

below in complete sentences, whenever it is necessary.

Describe and derive an expression for the marginal cost

(MC) curve.

Describe and estimate the incremental costs of the

extra 200 pairs per week (from 1,000 pairs to 1,200 pairs of shoes).

What are the profit-maximizing price and output levels

for Paradise Shoes? Describe and calculate the profit-maximizing price and

output.

Discuss whether or not Paradise Shoes should expand its

output further beyond 1,200 pairs per week. State all assumptions and

qualifications that underlie your recommendation.

Carefully review the.waypointoutcomes.com/assessment/3735/preview”>Grading Rubric for

the criteria that will be used to evaluate your assignment.

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