Midwest Block and Birck in Jefferson City, Missouri make concrete blocks for the outer facade of a new school or condo building. Concrete is a particularly interesting market because markets are very local. You can’t economically ship concrete blocks. Suppose Midwest Block and Brick are considering entering a new market in south-eastern Kansas. A concrete plant requires an up-front investment of $735,000 and will have a useful life of just one year. labor costs are limited; the plant requires 4 employees, each of whom is paid $10 per hour and guaranteed 40 hours a week.

The variable cost of making blocks comes from three sources: raw materials, power, and maintenance. concrete blocks are produced by combining cement, water, sand, and gravel. Suppose that the raw materials and power used to produce one block cost $0.25. Suppose further that the plant’s annual maintenance costs depend on how much block is produced in a given year. Specifically, if the plant produces Q blocks, then the annual maintenance cost is given by 0.000002Q². This means, for example, that if a plant is scheduled to produce a million blocks in a year, then the annual maintenance cost will be,

0.000002Q² = 0.000002(1, 000, 000)²

= $2, 000, 000

Hint: An annual salary is considered a fixed cost. Factor in the labor costs for the year

where calculating the total cost.

The Marginal Cost for Midwest Blocks is: 0.25 + 0.000004Q.

Suppose Midwest Block estimates the annual demand for a block in south-eastern Kansas is a million blocks, at which they can get a price of $4 per block. How many plants should they build in south-eastern Kansas and how many blocks should they produce in each plant?

Prepare for the in-class discussion by answering the following questions:

• 1. Why are annual salaried employees considered a fixed cost rather than a variable cost?
• 2. How does the firm’s average variable cost change with the quantity of block produced?
• 3. At the profit-maximizing solution, what is true about the economies of scale for each plant?