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Production & Cost Case Study

1. Costs and Revenue of Tarangelic Riz :

(a)

Output TR MR TFC TC TR-TC TVC MC ATC AVC


(Kg)
0 $0 - $30 $30 -30 0 - - -
1 10 10 $30 39 -29 9 9 39 9
2 20 10 $30 45 -25 15 6 22.5 7.50
3 30 10 $30 48 -18 18 3 16 6
4 40 10 $30 55 -15 25 77 13.75 6.25
5 50 10 $30 65 -15 35 10 13 7
6 60 10 $30 80 -20 50 15 13.33 8.33
7 70 10 $30 100 -30 70 20 14.29 10
8 80 10 $30 140 -60 110 40 17.5 13.75
9 90 10 $30 220 -130 190 80 24.44 21.11
10 100 10 $30 340 -240 310 120 34 31

(b) What is the profit-maximising output of Tarangelic Riz? Briefly explain why.

The profit-maximising would be at output for as Marginal Revenue is equal


to Marginal Cost.

(c) When does diminishing marginal returns set in? Explain your answer.

It starts at output 6 onwards when Marginal Revenue is less than Marginal


Cost.

(d) What would you advise Tarangelic Riz to do in the short run and why?

I would advise them to continue production as their P > ATC (price more
than covers the average cost of production) in which they are making
profit,

(e) Does Tarangelic Riz expect more competitors to enter this market in the long run? Why
or why not? (Hint: is it feasible to remain in the industry for this firm?)

They can expect competitors to enter this market in the long run. They
should follow the Economies of Scale which is to put the average cost
down as output increases in the long run. They should do bulk buying,
have greater specialization and labour.
2. What are some sources of economies of scale for McDonalds or KFC, which has many
restaurants around the world?

Since MCD and KFC are both big and branded names, they do bulk buying.
They also do research and development on how to make their products
and services better which also include advertising. They have people
specialized in different aspect of their operation and have greater division
of labour.

3. Mr Yong Teng Wei gave up his cushy job as a banker to start up his business. He spent
about $65,000 setting up each of his two outlets, AkiFamily Salon, after he gave up his cushy
job as a banker where he used to earn $120,000 per annum.

My Yong used his personal savings to set up the two outlets, which could have earned him
1% per annum in a saving account.

In addition, the rent he pays for the shop space is $16,000 a month, total wages paid to
hairstylists are $8,000 per month, and he incurs miscellaneous costs of $1,000 per month.

(a) Calculate the explicit cost of Aki Family Salon

Explicit cost (Rent for 1 year @$16k per mth = $192 000) + (Wages for 1
year @$8k per mth = $96 000) + (Misc cost for 1 year @1K per mth =
$12 000) = $300 000

(b) Calculate the implicit cost of Aki Family Salon

Implicit cost (Setting up of 2 salons $65k per salon = $130 000) +


(Interest which he could earn for 1 year $1300) + (Forgone salary = $120
000) = $251 300

(c) Calculate the total cost of Aki Family Salon

Total cost is FC + VC ($192000 + $96 000) = $288 000

(d) Calculate the amont of total revenue Aki Family Salon would need to earn in its first year
of operations in order to break even.

Aki Family Salon should have normal profit which is to break even,
economic profit = 0 and implicit cost = accounting profit.

Therefore their TR should be at $551 300 which is the explicit cost.

4. Do you have any questions about Production & Cost that you would like to ask?
I do not understand the Long Run and Short Run production. Having a
lecturer doing this lesson in class would be better to understand this
weeks session as there are calculations involve.