PART 1 Sally is launching MyBeer. In order to launch her new brand, Sally must build a new brewery and engage in engage in a massive media campaign to promote MyBeer. The brewery will cost Sally $2 million. It can be resold if necessary to the other brewing company in town, Good ol Beer, for $1.5 million. Sally hires the marketing firm of Our World to devise the advertising campaign for MyBeer. They recommend spending $8 million on advertising in a one-time massive media blitz, to which Sally agrees. Once Sally begins production of MyBeer, it costs her $5 a case to produce. 1. Suppose Sally produces 1 million cases of MyBeer. What are her fixed costs? What are her variable costs? 2. Are any of her costs sunk (a sunk cost is a cost that's been incurred, but is no longer an opportunity cost)? If so, how much are they? Explain why these costs are sunk costs. 3. What are marginal at 1 million cases produced? What are average costs? 4. Is production of MyBeer characterized by economics of scale, diseconomies of scale, or no economics or diseconomies (constant returns)? Explain. 5. Graph the total, average, and marginal costs of producing MyBeer. PART 2 Suppose a firm employs labor as its only variable input. All workers are paid $20 per day. Output per day (9) and variable cost (VC) are shown in the table below. Complete the table, showing labor, average variable cost, and marginal cost for the first eight units of output. Draw a graph showing average and marginal cost. L AVC MC 9 0 1 2 3 4 5 VC 0 20 40 60 80 120 160 240 320 6 7 8 PART 1 Sally is launching MyBeer. In order to launch her new brand, Sally must build a new brewery and engage in engage in a massive media campaign to promote MyBeer. The brewery will cost Sally $2 million. It can be resold if necessary to the other brewing company in town, Good ol Beer, for $1.5 million. Sally hires the marketing firm of Our World to devise the advertising campaign for MyBeer. They recommend spending $8 million on advertising in a one-time massive media blitz, to which Sally agrees. Once Sally begins production of MyBeer, it costs her $5 a case to produce. 1. Suppose Sally produces 1 million cases of MyBeer. What are her fixed costs? What are her variable costs? 2. Are any of her costs sunk (a sunk cost is a cost that's been incurred, but is no longer an opportunity cost)? If so, how much are they? Explain why these costs are sunk costs. 3. What are marginal at 1 million cases produced? What are average costs? 4. Is production of MyBeer characterized by economics of scale, diseconomies of scale, or no economics or diseconomies (constant returns)? Explain. 5. Graph the total, average, and marginal costs of producing MyBeer. PART 2 Suppose a firm employs labor as its only variable input. All workers are paid $20 per day. Output per day (9) and variable cost (VC) are shown in the table below. Complete the table, showing labor, average variable cost, and marginal cost for the first eight units of output. Draw a graph showing average and marginal cost. L AVC MC 9 0 1 2 3 4 5 VC 0 20 40 60 80 120 160 240 320 6 7 8