NAME:_________________________________ Tonie is passionate about cupcakes, and she is thinking about running her own cupcake bakeshop. Her shop will be relatively small, compared to the market for sweet baked goods, so she won't be a big player but nonetheless she will be doing what she is passionate about. To do this, Tonie will be giving up her part-time job as a cashier which earns her $800 a month. She located a closed bakeshop location and promptly started negotiating with the owner. The owner did not want to sell the location, but agreed to a month-to-month lease for $1,000 a month. This price includes the equipment, the insurance and the utilities. All she needs is to hire workers. After some research, she estimates that she can produce 1,500 cupcakes a month if she hires one worker, 3,200 if she hires two workers, 3,800 if she hires 3 workers, 4,300 if he hires four workers and 4,500 if he hires five workers. With this current setup, 4,500 cupcakes per month is the maximum amount of cupcakes that she can produce. In other words, hiring a 6 th worker does not yield any additional output. Tonie is using her grandmother's unique recipe which uses all organic ingredients (produced in her grandmother's farm and provided at no cost to her), you ran some market tests for her, and you estimate that to sell 4,500 cupcakes she must price each unit at $2.00, to sell 4,300 must price each unit at $3.00, to sell 3,800 must price each unit at $4.00, to sell 3,200 must price each unit at $5.00, and to sell 1,500 must price each unit at $6.00. Any price above $6.00 (say $6.01) has Tonie selling zero units. Each worker earns $2,000 per month. In addition, she estimates that to sell a cupcake she needs to spend $0.10 in social media advertisement. In other words, to sell one cupcake she must spend $0.10 and to sell 2 she must spend $0.20. You are her best friend and she is coming to you for advice on whether she should quit her job, or open her bake shop, and what it will take to keep the business earning profits. 1. (20 points) Price per unit Complete the table below. Cupcakes per month (Q) Fixed Costs Variable Costs Total Cost Ave. Total Cost ///////// Margin al Total Economic Margin Revenu Revenue Profit/Loss al Cost e $6.01 0 1,800 $0.00 6 1500 1800 2150 5 3200 1800 16000 4 3800 1800 15200 3 4300 1800 12900 2 4500 1800 9000 0 ///////// / ///////// 9000 2. (10 points) How many units should Tonie Produce each month? ____________ 3. (5 points) What is Tonie's monthly maximum monthly level of economic profits (in $'s)? ___________ 4. (5 points) What is Tonie's monthly maximum level of accounting profits (in $'s)? ____________ 5. (10 points) Calculate Price Elasticity of Demand if the price goes from $5.00 to $6.00._______________.Is the demand considered elastic, unit elastic, or inelastic? ___________ 6. (5 points) Which graph (see below) best represents Tonie's Demand Curve? 7. (10 points) Which Market Structure is Tonie competing in? Compose a paragraph in which you explain your rationale. your grade will depend on how clear, accurate, precise, relevant and logical your response is. Your response must contain the following elements: a) Your response, and the reason why. b) Relevant information/data (calculated and/or provided as part of the case study. c) What are the characteristics of the market structure Tonie is competing in. 8. (10 points) When the demand curve is relatively inelastic and the price falls, what happens to total revenue? If the demand is relatively elastic and price rises, what happens to total revenue? Compose a paragraph in which you explain your rationale. your grade will depend on how clear, accurate, precise, relevant and logical your response is. 9. (10 points) How do monopolistically competitive markets differ from perfectly competitive markets? Compose a paragraph in which you explain your rationale. your grade will depend on how clear, accurate, precise, relevant and logical your response is
