Introduction To These Scenarios For Practice Applying ✓ Solved

Introduction These scenarios will give you practice applying concepts

These scenarios will give you practice applying concepts from the readings to models of real-world situations. Activity Instructions: Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences. I am looking for your thought process in the answers to the questions, so be complete in your answers and use the opportunity to clearly demonstrate your newly acquired knowledge.

Scenario 1: Cupcake Store Analysis

A cupcake store is located in a mall and is the only cupcake store in that mall. The demand schedule for cupcakes (per dozen) is given in the table below:

If the marginal cost to produce a dozen cupcakes is $4 per unit, we need to determine the optimal quantity of cupcakes to produce, the price to charge, and the profit for the firm, considering fixed costs of $100 per day.

Optimal Price and Quantity Calculation

The optimal price is set where the quantity demanded meets the marginal cost. Given a marginal cost of $4, the corresponding price to charge would be $6 for 100 dozen sold. To calculate profit:

• Revenue = Price × Quantity = $6 × 100 = $600
• Costs = Fixed Cost + Variable Cost (Marginal Cost × Quantity) = $100 + ($4 × 100) = $500
• Profit = Revenue - Costs = $600 - $500 = $100

The price elasticity of demand at the optimal price and quantity can be calculated using the point elasticity formula:

• P = $6, Q = 100
• Price change ΔP = $5 - $6 = -$1
• Quantity change ΔQ = 100 - 160 = -60
• Elasticity = (ΔQ/ΔP) × (P/Q) = (-60/-1) × (6/100) = 3.6

This indicates that the demand is elastic, meaning a change in price will significantly influence the quantity demanded. The formula for finding the correct level of output on page 65 is satisfied.

Scenario 2: Restaurant/Bar Beer Pricing

A restaurant/bar is analyzing its pricing of beer with a price elasticity of demand of -0.8. The current average price of a beer is $4.50, with sales of 250 pints per night. Its marginal cost for beer is $2. If the price is lowered to $4:

• Current Profit = (Price - Marginal Cost) × Quantity = ($4.50 - $2) × 250 = $625
• Price change = ($4 - $4.50)/$4.50 = -11.11%
• Using the elasticity, projected change in quantity sold is: ΔQ = Elasticity × (ΔP/P) = -0.8 × (-0.1111) × 250 = 22.22 pints.
• New Quantity Sold = 250 + 22.22 = 272 pints.

Impacts on cross-price elasticity affect sales of wine, appetizers, and entrees accordingly.

Scenario 3: Economies and Diseconomies of Scope

Chef Gordon Ramsay’s recommendation to reduce menu size relates directly to economies and diseconomies of scope. By reducing the number of offerings, the restaurant can focus resources, streamline operations, and reduce waste. The learning curve supports this by indicating that fewer items increase efficiency and decrease unit costs through specialization.

Scenario 4: Corn Market Impact

In the U.S corn market, increased ethanol mandates and a blight would shift the supply curve leftward, increasing prices and reducing equilibrium quantity. The wheat market, being a substitute, would see a rightward shift in its demand curve due to decreased corn availability, further increasing wheat prices.

Scenario 5: Housing Market Analysis

The observations from the housing market crash can be understood as shifts in both supply and demand curves, with reduced demand due to economic downturn and supply constraints leading to fewer houses sold.

Conclusion

This exercise demonstrates the practical application of economic concepts in analyzing real-world business scenarios across various contexts.

References

• 1. Mankiw, N. G. (2016). Principles of Economics. Cengage Learning.
• 2. Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics. Pearson.
• 3. Case, K. E., & Fair, R. C. (2015). Principles of Economics. Pearson.
• 4. Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.
• 5. Blaug, M. (2008). Economic Theory in Retrospect. Cambridge University Press.
• 6. Krugman, P., & Wells, R. (2018). Economics. Worth Publishers.
• 7. Mankiw, N. G. (2021). Principles of Microeconomics. Cengage Learning.
• 8. Katz, M. L., & Rosen, H. S. (2019). Microeconomics. McGraw-Hill Education.
• 9. Friedman, M. (2008). Capitalism and Freedom. University of Chicago Press.
• 10. Stiglitz, J. E. (2000). Economics of the Public Sector. W.W. Norton & Company.