Scenario 1 (length: as
needed)
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, how many units should the
firm produce?

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Question: Scenario 1 (length: as needed)A cupcake store is located in a mall and is the only cupcake store …
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Price

Quantity
Purchased

  
(Dozen per day)

$12

    
3

$11

    
7

$10

    12

$9

    20

$8

    35

$7

    60

$6

   100

$5

   160

$4

   250

  1. What price should the cupcake store
    charge?
  2. If the fixed cost for the firm is
    $100 per day, how much profit will the firm make in one
    day?
  3. What is the price elasticity of
    demand at the optimal price/quantity combination (use the next
    lower price level as the second point in your
    calculation)?
  4. Is the formula for finding the
    correct level of output on the bottom of page 65 in your text
    satisfied?

Scenario 2 (length: as
needed)
A restaurant/bar is analyzing its pricing of beer.
It has determined that the price elasticity of demand for beer is
?0.8; the cross-price elasticity for wine with respect to the price
of beer is 0.9; the cross-price elasticity for appetizers is -1.4;
and the cross-price elasticity for entrees is -2.2. The current
average price of a beer at this bar is $4.50, and the restaurant
sells 250 pints of beer a night. The price of wine averages $8 a
glass, and on a typical night 40 glasses of wine are purchased. An
appetizer is priced at an average price of $6, and an entree costs
$12 on average. The average number of appetizers and entrees sold
per night is $70 and $25, respectively. The marginal cost of a pint
of beer is $2; an additional glass of wine sold increases costs by
$5; an appetizer increases costs by $4; and an entree has a
marginal cost of $7. The restaurant is considering lowering the
price of beer to $4.

  1. What is the restaurant’s profit
    (prior to the price change)?
  2. Using the midpoint formula at the
    bottom of page 64, by what percent would the price of beer change?
    Using the price elasticity of demand and the approximation for the
    change in quantity on page 67, how many pints of beer would the
    restaurant sell after the price change?
  3. Using the price change of beer and
    the cross-price elasticities, how many glasses of wine, appetizers,
    and entrees would the restaurant sell after the price change of
    beer?
  4. What would the profit of the
    restaurant be after the price change?
  5. Should the restaurant lower the
    price of beer to $4 based on your analysis?

Scenario 3 (length: as
needed)
In “Kitchen Nightmares,” Chef Gordon Ramsay visits
struggling restaurants and gives the owners of the restaurant a
number of recommendations intended to reverse the restaurant’s
prospects. One suggestion Chef Ramsay commonly makes is to reduce
the size of the restaurant’s menu and concentrate on a smaller
number of offerings. Our textbook has several theories that can be
used to explain how that recommendation can reduce
costs.

  1. Explain how the recommendation is
    an application of Economies and Diseconomies of Scope.
  2. Explain how the Learning Curve
    concept also would suggest a smaller menu would lead to a cost
    reduction.

Scenario 4 (length: as
needed)
Consider the market for corn in the United States.
Suppose that the mandated percentage of ethanol in gasoline is
increased and at the same time a corn blight destroys a significant
portion of the corn crop.

  1. Using a supply and demand diagram,
    show what happens to the equilibrium quantity and price of corn in
    the United States.
  2. Explain why you are moving the
    curve(s) that you are?
  3. Using a supply and demand diagram,
    show how the changes in the corn market would affect the market for
    wheat (a substitute for corn).

Scenario 5 (length: one
paragraph)
Review the following resources:

  • Website: S&P Case-Shiller 20-City Home Price Index
    (SPCS20RSA)
  • Website: New
    One Family Houses Sold: United States (HSN1F)

During the housing crash in 2008,
housing prices fell, and the number of new houses sold in the
United States also fell. The link to

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