# 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:

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Problem 1:

William is the owner of a small pizza shop and is thinking of increasing
products and lowering costs. Williamâs 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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question in complete sentences, whenever it is necessary.

Which inputs are fixed and which are variable in the
production function of Williamâs 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

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).

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