Answerallthe following questions for a total of 15 marks

Costs of Production

1. Suppose that you and a friend have started a pizza delivery business. First you had to find a shop front to make the pizzas and this costs $20,000 per year plus set up costs of $45,000 for the oven and kitchen set up. You estimate that the daily costs of labour will be $300; the costs of making a pizza is around $2.50 each and delivery is around $2 per pizza.

a) Calculate the fixed costs of this business. If you use your combined savings to pay these costs what is the estimated implicit cost of starting the business in the first year if the interest rate is 4% per year. (3 marks)

b) If you can make and deliver 300 pizzas per day calculate the variable cost of a single delivered pizza. (2 Marks)

c) What is the marginal cost of a delivered pizza? (1 Mark)

Demand and Supply

2. Your pizza delivery business 'Fast Pizza' has been operating for a number of months. Use the process of comparative statics to analyse the following changes in market conditions for the pizza delivery (Assume that your business is one of many in a competitive market).

a) The government locks down the economy to prevent the spread of a deadly infectious virus, but still allows food delivery. (2 Marks)

b) The economy falls into a deep recession reducing consumer income. (2 marks)

c) Oven Inc develops a new pizza oven that significantly reduces the costs of electricity and increases the number of pizzas that can be cooked per hour. (2 Marks)

Elasticity

3.Your business partner finds a new way to organise the business that reduces the cost of delivering a pizza. She believes this will enable the business the reduce the price of pizza from $12 to $10. It is estimated that the price elasticity of demand for pizza is -1.3. What will happen to total revenue if the price of pizza is decreased?What should you do? (3 Marks)