Answer all the following questions for a total of 15 marks Costs of Production 1. Suppose that you and a friend have started a pizza delivery business and you call it 'Pizza Pronto'. First you had to find a shop front to make the pizzas and this costs $30,000 per year plus set up costs of $75,000 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 $7 each and delivery is around $3 per pizza. ) Calculate the fixed costs of this business. If you use your combined savings to pay these fixed costs what is the estimated implicit cost of starting the business in the first year if the interest rate is 5% per year. (3 marks) b) If you can make and deliver 500 pizzas per day calculate the variable cost of a single pizza. (2 Marks) c) Calculate the marginal cost of a delivered pizza? (1 Mark) Demand and Supply 2. Use the process. of comparative statics to analyse the following changes in market conditions for the pizza delivery in the greater northern suburbs (Hint: You are analysing the general market conditions, assuming a competitive market) a) The economy has strong growth, increasing consumer income. (3 marks) b) 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. (3 Marks) Elasticity 3. You find a new way to organise the business that reduces the cost of delivering a pizza. You believe this will enable the business the reduce the price of pizza from $16 to $13. 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? Should you decrease the price of the pizza? (3 Marks) B I I O U S X2 x2 E