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The Price of Cookies Stacie Legendre Colorado State University Global ECN210-1: Microeconomic Principles Marlo Chavarria 1

2 The Price of Cookies From the previous research and conclusion regarding the costs to bake three dozen cookies we were able to confer that the more cookies made the lower the expenses were on the per dozen batch. As a cookie baker I am also needing to determine the values and how to calculate my profits for each dozens of cookies I make. Before starting to determine the cost per unit the raw material required in the recipe. I decided to price out my ingredients and calculate the average costs, fixed costs, variable costs, average variable costs, average fixed costs and marginal costs. (DulciaBakery. 2021) I started out basing my figures on baking three dozen cookies which includes the sugar, chocolate chips, flour and eggs as the ingredients. After researching the prices of the raw materials, the total cost came to $5.47 for 3 dozen cookies including the 8.25% Colorado Springs sales tax I spend $5.92 per 3 dozen cookies. ( ColoradoSprings.gov 2021) (Safeway.com 2021) (Walmart.com. 2020) There are additional costs outside of the raw ingredients that were considered in the overall costs to make these cookies. These costs include the fixed cost to rent a kitchen with an oven for a day and the cost of my time at $10 per hour coupled with the hour it takes to make two dozen cookies. I will charge $10 per hour to bake the 3 dozen cookies making it $15 for my time to make the cookies. Making 3 dozen cookies would only take 1.5 hours but it costs $30 a day to rent the kitchen when I first started, and the rent dropped to $15 a day at a later date. I only make 3 dozen cookies in a day the overall costs will be $50.92 with the $30 per day kitchen rental and $35.91 with the $15 per day kitchen rental. As discussed in the prior reports the variable costs are the costs for raw ingredients and the amount of time is spend with the kitchen rental being the fixed costs. It was already determined that I would benefit from baking more cookies. The more cookies baked in a day would cause the fixed costs would decrease per unit making the per

3 dozen costs decrease. The following are the costs for the $30 and $15 per day kitchen rental and the effects they have on the per dozen expenses. If the fixed cost of the rent is lowered to $30 per day the new costs would be as follows: Quantity of cookies in dozens Fixed Costs Variable Costs Total Costs Average Total Cost Average Variable Cost Average Fixed Cost Marginal Cost 1 $30 $6.97 $36.97 $36.97 $6.97 $30 ------- 2 $30 $13.94 $43.94 $21.97 $6.97 $15 $6.97 3 $30 $20.91 $50.91 $16.97 $6.97 $10 $6.97 4 $30 $27.88 $57.88 $14.47 $6.97 $7.5 $6.97 5 $30 $34.85 $64.85 $12.97 $6.97 $6 $6.97 6 $30 $41.82 $71.82 $11.97 $6.97 $5 $6.97 7 $30 $48.79 $78.79 $11.26 $6.97 $4.29 $6.97 8 $30 $55.76 $85.76 $10.72 $6.97 $3.75 $6.97 9 $30 $62.73 $92.73 $10.30 $6.97 $3.33 $6.97 10 $30 $69.70 $99.70 $9.97 $6.97 $3 $6.97

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4 If the fixed cost of the rent is lowered to $15 per day the new costs would be as follows: Quantit y of cookies in dozens Fixe d Cost s Variabl e Costs Total Costs Averag e Total Cost Averag e Variabl e Cost Averag e Fixed Cost Margin al Cost 1 $15 $6.97 $21.9 7 $21.97 $6.97 $15 ------- 2 $15 $13.94 $28.9 4 $14.47 $6.97 $7.50 $6.97 3 $15 $20.91 $35.9 1 $11.97 $6.97 $15 $6.97 4 $15 $27.88 $42.8 8 $10.72 $6.97 $3.75 $6.97 5 $15 $34.85 $49.8 $9.97 $6.97 $3 $6.97

5 5 6 $15 $41.82 $56.8 2 $9.47 $6.97 $2.5 $6.97 7 $15 $48.79 $63.7 9 $9.11 $6.97 $2.14 $6.97 8 $15 $55.76 $70.7 6 $8.85 $6.97 $1.88 $6.97 9 $15 $62.73 $79.7 3 $8.86 $6.97 $1.67 $6.97 10 $15 $69.70 $84.7 0 $8.47 $6.97 $1.50 $6.97 As costs decrease the profit increases if the amount charged stays the same or increases. Based on the following figures within a monopoly condition with fixed costs of $15 and $30, we can determine that the marginal revenue is less than the marginal costs because of the over production of the cookies. The marginal revenue on the additional units sold appears to be lower

6 than the price per dozen because there is less revenue. Quantity of cookies in dozens Price Total Revenue (Price x Quantity) Marginal Revenue Average Revenue Fixed Costs ... Fixed Costs Marginal Cost 1 10.00 $ 10.00 $ 10.00 $ 10.00 $ $15 ... $30 $6.97 2 9.00 $ 18.00 $ 8.00 $ 9.00 $ $15 ... $30 $6.97 3 8.00 $ 24.00 $ 6.00 $ 8.00 $ $15 ... $30 $6.97 4 7.00 $ 28.00 $ 4.00 $ 7.00 $ $15 ... $30 $6.97 5 6.00 $ 30.00 $ 2.00 $ 6.00 $ $15 ... $30 $6.97 6 5.00 $ 30.00 $ - $ 5.00 $ $15 ... $30 $6.97 7 4.00 $ 28.00 $ (2.00) $ 4.00 $ $15 ... $30 $6.97 8 3.00 $ 24.00 $ (4.00) $ 3.00 $ $15 ... $30 $6.97 9 2.00 $ 18.00 $ (6.00) $ 2.00 $ $15 ... $30 $6.97 10 1.00 $ 10.00 $ (8.00) $ 1.00 $ $15 ... $30 $6.97 With the $30 per day kitchen rental the profit changes however, the total costs to make the cookies is more than the total revenue causing a negative profit. Quantity of cookies in dozens Fixed Costs Variable Costs Total Costs (FC +VC=TC) Price Total Revenue (Price x Quantity) Marginal Revenue Profit (TR-TC= Profit) 1 $30 $6.97 $36.97 $5.00 $5.00 $5.00 ($31.97) 2 $30 $13.94 $43.94 $5.00 $10.00 $5.00 ($33.94) 3 $30 $20.91 $50.91 $5.00 $15.00 $5.00 ($35.91) 4 $30 $27.88 $57.88 $5.00 $20.00 $5.00 ($37.88) 5 $30 $34.85 $64.85 $5.00 $25.00 $5.00 ($39.85) 6 $30 $41.82 $71.82 $5.00 $30.00 $5.00 ($41.82) 7 $30 $48.79 $78.79 $5.00 $35.00 $5.00 ($43.79) 8 $30 $55.76 $85.76 $5.00 $40.00 $5.00 ($45.76) 9 $30 $62.73 $92.73 $5.00 $45.00 $5.00 ($47.73) 10 $30 $69.70 $99.70 $5.00 $50.00 $5.00 ($49.70)

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7 As the price decreases to $15 for the rental of the kitchen the profit level increases from the $30 per day rental, however, is still a negative profit. Quantity of cookies in dozens Fixed Costs Variable Costs Total Costs (FC +VC=TC) Price Total Revenue (Price x Quantity) Marginal Revenue Profit (TR-TC= Profit) 1 $15 $6.97 $21.97 $5.00 $5.00 $5.00 ($16.97) 2 $15 $13.94 $28.94 $5.00 $10.00 $5.00 ($18.94) 3 $15 $20.91 $35.91 $5.00 $15.00 $5.00 ($20.91) 4 $15 $27.88 $42.88 $5.00 $20.00 $5.00 ($22.88) 5 $15 $34.85 $49.85 $5.00 $25.00 $5.00 ($24.85) 6 $15 $41.82 $56.82 $5.00 $30.00 $5.00 ($26.82) 7 $15 $48.79 $63.79 $5.00 $35.00 $5.00 ($28.79) 8 $15 $55.76 $70.76 $5.00 $40.00 $5.00 ($30.76) 9 $15 $62.73 $79.73 $5.00 $45.00 $5.00 ($34.73) 10 $15 $69.70 $84.70 $5.00 $50.00 $5.00 ($34.70) As the number of cookies increase by one doze the variable costs increase by $6.97 per dozen which makes the total costs increase. If we research cheaper ingredients either by alternatives or by decreasing the overall costs of the same ingredients there is an opportunity to decrease the total cost and increase the profit potential. Possible options to look into is buying generic or buying in bulk to lower the costs of the raw materials or finding a less costly kitchen rental or purchasing my own equipment that could allow for the elimination of a kitchen rental all together and eventually lowering the fixed rate costs. This will in turn maximize the potential profits by lowering and close to eliminating a large portion of the expenses. ( G. N. Mankiw. 2017). Conclusion

8 It appears that the costs with the additional information led to no profit at all. This is unfortunate as the original calculation provide a more positive potential. The price of the cookies appears to need to be higher which could cause a problem for them to be purchased if the other cookies being sold are at a lower cost. In the situation of me holding a monopoly on the cookies I would have opportunity to charge what I chose to give me a decent profit but also keeping in mind what the consumer is willing to pay for cookies.

9 References Walmart.com. (2020) Walmart Mobil app Safeway.com (2021) Safeway Mobil app DulciaBakery. (2021) How Much to Charge for your Homemade cookies for profit; Retrieved from https://dulciabakery.com/2019/02/19/__trashed/ ColoradoSprings.gov (2021) Tax information; Retrieved from https://coloradosprings.gov/sales- tax/page/sales-tax-information Mankiw, G. N. (2017). Principles of Microeconomics (8th ed.). Cengage Learning.

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