Costs of Production

1. Suppose that you and a friend have started a food truck venture specialising in curries, and you call it 'Hurry Curry'. You buy a renovated food truck for $150,000 and have to pay a yearly license fee of $5,000 and insurance of $2,000. You estimate that the daily costs of labour will be $600; the cost of making a curry per serve is around $6.00 each and power costs are $100 per day.

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

b) If you can make 300 curry serves per day calculate the variable cost of a single curry serve.

c) Calculate the marginal cost of a single curry serve per day.

Demand and Supply

2. Use the process of comparative statics to analyse the following changes in market conditions for the food truck cuisine in capital city (Hint: You are analysing general market condition assuming a competitive market).

a) In the aftermath of a global pandemic the economy falls into a deep recession reducing consumer income.

b) There is a rise in the price of the raw food ingredients by 25%.

Elasticity

3. You discover a new way to organise the preparation of ingredients that decreases the cost and increases the number of serves per day. You believe this will enable the business to reduce the price of a serve of curry from $15 to $10. It is estimated that the price elasticity of demand for food truck cuisine is -1.5. What will happen to total revenue if the price of a curry per serve is decreased? Should you decrease the price of the curry?