Question

I1-magine that you were setting up a small lemonade stand. There are lots of others in the neighborhood. How would you determine both your costs of production and what price to charge?

(Hints: (1) Remember the profit maximizing steps discussed in the text; (2) Be sure to distinguish between fixed and variable costs.(3) This is a perfect competition discussion; all lemonade is identical.)

2- Consider this decision scenario related to your studies on whether or not FIT should run a class. (All numbers made up.) Relevant information and assumptions are:

For each student FIT receives $300 in tuition per class and another $300 in state aid, $600 altogether.

We are considering whether to let a night class in Labor Economics run.

We are assuming that we are using an adjunct (part-time) instructor that we pay $2,000 to teach the class.

We are assuming that if the class doesn't run, we'll lose all the students, that they'll go to another college to take the class or will just do something else with their time. Also, that this class doesn't have an effect on whether or not they take other classes at FIT.

In order for a class to cover all of the fixed (things like the Dean's and President's salaries and the building and insurance that you will have to pay whether or not you run the class) and variable costs associated with it (variable costs are mainly the instructor who you will have to pay if you run the class and won't have to pay if you don't) it needs to generate $9,000 with an enrollment of 15 students.

10 students sign up for the class

Discussion question.... Do you run the class or cancel it? Why or why not using concepts from thi

Answer 1

1. You will determine the cost of production by adding fixed costs, like cost of table, table cover, glasses, pitcher, etc. To these you will add varible costs --- costs that vary with your productin of lemonaid, costs like cost of lemonaid mix, high-quality mineral water from one of the best fountains in the world (just as other lemonaid sellers are doing), value of your time, etc.

Your price will be set competitively. You will survey to find out what others are charging for their lemonaid. You charge the same price others are charging, under perfect competition price is given. It has to be higher than your variable costs, so you can cover your variable costs and use the money you make over variable costs to pay off your fixed costs over time. The price you charge should be such that it covers both variable and fixed costs in the long run, othewise you will make a loss and go out of business of selling lemonaid. If you know this from the start, you are better-off not starting to sell lemonaid.

2) You run the class with 10 students, since it earns some money over the variable costs to pay towards covering fixed costs. When 10 students sign up, FIT gets $600 per sutdent or $,6000 total. FIT's variable costs of hiring an instructor are are $2,000. It makes $4,000 over its variable costs that can be used to cover part of the fixed costs that are to be paid whether the class is run or not.