Suppose you manage a business that produces high-end dog food. The business produces 3,000 dog food cans per day, and can sell each can at $2.00/can regardless of how much is produced. Your firm currently employs 20 workers, each of whom earns $15/hour and work 8 hours per day. Inputs, like the meat for the food and the metal for the can, cost $1.00/can. Your overhead expenses, including rent, property taxes, insurance, etc., which does not vary with the number of cans produced, equals $250 per day. a. (3) Calculate your company’s current daily profit. You’re considering whether to hire additional workers to produce additional cans. Each worker would be paid $15/hr. and material costs remain constant at $1.00/can. You estimate the 21st employee would produce an additional 200 cans per day, and the number of additional cans from each additional worker would be decreasing by 40 (a 22nd employee could produce an additional 160 cans per day, a 23rd employee could produce an additional 120 cans per day, etc.). b. (5) Calculate the marginal costs (change to total cost/change to output) associated with producing additional cans for employees 21 through 25. Note each employee works 8 hours/day. c. (3) If you could still sell each can for $2.00/can, how many employees should you hire, how many additional cans should you produce, and what is your company’s new daily profit?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter4: Extent (how Much) Decisions

Section: Chapter Questions

Problem 3MC

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Suppose you manage a business that produces high-end dog food. The business produces 3,000 dog food cans per day, and can sell each can at $2.00/can regardless of how much is produced. Your firm currently employs 20 workers, each of whom earns $15/hour and work 8 hours per day. Inputs, like the meat for the food and the metal for the can, cost $1.00/can. Your overhead expenses, including rent, property taxes, insurance, etc., which does not vary with the number of cans produced, equals $250 per day. a. (3) Calculate your company’s current daily profit. You’re considering whether to hire additional workers to produce additional cans. Each worker would be paid $15/hr. and material costs remain constant at $1.00/can. You estimate the 21st employee would produce an additional 200 cans per day, and the number of additional cans from each additional worker would be decreasing by 40 (a 22nd employee could produce an additional 160 cans per day, a 23rd employee could produce an additional 120 cans per day, etc.). b. (5) Calculate the marginal costs (change to total cost/change to output) associated with producing additional cans for employees 21 through 25. Note each employee works 8 hours/day. c. (3) If you could still sell each can for $2.00/can, how many employees should you hire, how many additional cans should you produce, and what is your company’s new daily profit? d. (2) Suppose the price increases to $2.50/can. What is the new profit maximizing quantity and what is your company’s daily profit? d. (2) Suppose your company’s fixed costs were $350 per day instead of $250 per day (price remains $2.50/can). What is the profit maximizing quantity and what is your company’s daily profit? e. (1) What is the name of your high-end dog food company ??

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