Question

Coffee shop case study

Suppose I own a coffee shop on campus and need to decide how many workers to hire for each hour. I could hire just one worker and he would need to do everything. This would probably result in fewer sales, but it would help keep my labor costs low. Alternatively, I could hire 10 workers and this would result in many more sales, but my labor cost would be 10 times higher.

I sell basic coffee for $2.50 per cup. If I decided to sell coffee for more, nobody would come to my coffee shop because there are lots of other coffee shops on campus selling basic coffee for $2.50. For simplicity, assume that my only other cost of selling a cup of coffee is the ingredients which cost $0.50 per cup.

If I hire just 1 worker, she sells around 10 cups of coffee per hour and there is usually a pretty long line of people waiting to get coffee. If I hire 2 workers, together they are able to sell 18 cups of coffee per hour and there is a line of 5-6 people most times. If I hire 3 workers, together they are able to sell 25 cups of coffee per hour and the line is only 2-3 people. If I hire 4 workers, together they are able to sell 30 cups of coffee per hour and there is always 1 person in line. If I hire 5 workers, they sell 35 cups of coffee per hour and there are no lines.

Workers get paid $12 per hour.

Discussion questions:

1) How many workers should I hire? Clearly explain your reasoning.
2) Suppose that during finals week there is a huge increase in demand for coffee. There are no new coffee shops built just for finals week. What elements of the scenario are likely to change? Should I change the number of workers hired each hour? What guides this decision?
3) Suppose that USC places a price cap of $2.50 on coffee during finals week. What will that do to the length of the line at my coffee shop during finals week? How many workers should I hire during finals week in this scenario?
4) Discuss how your answer to question 2 and 3 relates to the scale effect.
5) Based on your answer to question 4, evaluate this common claim “When product demand goes up, firms hire more workers in order to meet demand for their product”.

Answer 1

Answer 1- you should hire 3 workers because on that point only Average production ( AP) >Marginal production ( MP) which is 8.1>7

Mp 10,9,7,5,-5

Tp 10,18, 25,30,35

Ap --, 9,8.1, 7.5, 7

Answer 2.yes you can increase the number of workers till that your marginal product will be in negative , if you will continue to do increase the workers, your Total production will go to at par , then decrease and after some time in negative

This is the law of diminishing total productivity.

Answer 3- if the price cap will higher then their is a chance of Decrease in demand..but in your scenario their is no other shops, no substitute so demand will be inelastic and you need to higher same worker as usual

Answer 4- the scale effect by both the statement will be same , the you can increase the workers till your mp is positive once your marginal product will be in negative you need to hire some machinary not workers

Answer 5- firm higher more labour in proportion to capital and machinary , if we are rising only labour and labour as a variable factor of production , after some time our total production will decrease and net output will shocking