The Ale Works

You are the proud owner of The Ale Works, the most prominent (and only) location in Yellowstone National Park (which is quite large at 3,741 square miles) that is allowed to sell beer and ale, which you also produce on-site. Therefore, your demand curve is relatively inelastic (and you can assume it is linear). Your marginal cost of production is, on average, constant at $2 per bottle. People generally like to have a few cold beers with their food while camping, and you have estimated price elasticity of demand to be 1.5 (or -1.5 if you prefer) at your profit-maximizing quantity.

A- Assume, for the moment, that you have no fixed costs. How much profit are you making per bottle of beer? Calculate and explain.

B- The main ingredients for beer are water, yeast, hops, and malt. You just found a new supplier for the high-quality hops you use in your beer and this supplier is charging you less than your old supplier. Illustrate and explain what happens in your market.

C- The reality is that you DO have fixed costs (so ignore the assumption in Part A) - you have to pay for capital (K) and labor (L). Assume that you were cost-minimizing in Part A and that your production function has a Cobb-Douglas form. Fully illustrate and explain what happens in the short-run and long-run after the change in Part B (assume you will not shut-down).