1. ConcreteBlocks andTotalandAverageCost

Midwest Block and Birck in Jefferson City, Missouri makes concrete blocks for the outer facadeof a new school or condo building. Concrete is a particularly interesting market because marketsare very local. You can't economically ship concrete blocks. Suppose Midwest Block and Brickare considering entering a new market in south-eastern Kansas. A concrete plant requires anup-front investment of $735,000 and will have a useful life of just one year.labor costs arelimited;theplantrequires4employees,eachofwhomarepaid$10perhourandguaranteed40hoursaweek.

The variable cost of making block comes from three sources:raw materials, power, andmaintenance.concrete blocks are produced by combining cement,water,sand and gravel.Supposethattherawmaterialsandpowerusedtoproduce oneblockcost$0.25.Suppose furtherthattheplant'sannual maintenancecostsdepend onhowmuchblockisproducedina given year. Specifically, if the plant producesQblocks, then the annual maintenance cost isgiven by 0.000002Q².This means, for example, that if a plant is scheduled to produce a millionblocksinayear,thentheannualmaintenancecostwillbe,

0.000002Q²=0.000002(1,000,000)²

=$2,000,000

Hint:Anannualsalary isconsideredafixedcost.Factorinthelaborcostsfortheyear

wherecalculatingtotalcost.

TheMarginal CostforMidwest Blocksis:0.25+0.000004Q.

SupposeMidwestBlockestimatetheannualdemand forblockinsouth-easternKansas is

1. millionblocks,atwhichtheycangetapriceof$4perblock.Howmanyplantsshouldtheybuild insouth-easternKansasandhowmanyblocksshouldthey produceineachplant?

Prepareforthein-classdiscussionbyansweringthefollowingquestions:

• Whyisannualsalaried employeesconsideredafixedcostratherthanavariable cost?
• Howdoesthefirm'saveragevariable costchangewiththequantity ofblockproduced?
• Attheprofitmaximizing solutionwhatistrueabouttheeconomies ofscaleforeachplant?