Question

4.5 Mary is thinking of quitting her current job to operate an upstairs bakery store. Her current salary is $240,000 per year. Consider the following information for the coming year if she goes ahead to operate the upstairs bakery store full time.

To operate this business, Mary will use the unit she owns in a commercial building for her bakery store. Mary will earn a rental income of $180,000 in the coming year if she does not use the unit as her store.

She has to spend $600,000 to purchase physical capital such as furniture and equipment, and their market values will decrease by 25% in the first year of operation.

She has to pay $120,000 a year to hire an assistant. And she will pay herself an annual salary of $180,000.

She has to spend $60,000 on materials, utilities, and all other relevant costs in a year.

To finance the initial investment and operating costs, Mary has to use her saving of $200,000, from which she could earn an interest of 3 percent in the coming year.

a) Calculate (i) the relevant explicit costs, (ii) the implicit costs and (iii) the economic costs of operating the bakery store in the first year assuming that Mary can recover all of the $200,000 of her saving whenever she decides to terminate this business.

b) The market of bakery is currently considered as a perfectly competitive industry. The market demand for bakery is Qd=10-0.4P and the market supply is Qs=3+0.3P, where the quantities demanded and supplied are in millions of units. Calculate the highest price at which Mary can sell her product. Assume Mary will sell 60,000 units. What is the economic profit for her bakery store? Explain whether Mary should operate the store.

c) One big international bakery group has bought all the existing individual bakery stores and formed a monopoly. The market demand remains the same and the marginal revenue of the monopoly is MR = 25-5Q. This monopoly re-allocates all the production resources, and finally its total cost becomes TC=3Q2 -8Q+9 and its marginal cost is MC= 6Q-8, where Q is in millions of units. What will be the selling price and profit for this monopoly? Illustrate the profit-maximizing price and quantity in adiagram.

Answer 1