Question

Imagine that you have invested $1 million in a McDonald’s franchise restaurant. The investment includes expenses for land, buildings, and franchise fees.

What are some of the explicit costs and implicit costs of this franchise operation?

How do you expect the output of your franchise to change as you hire more labor? Do you expect to see increasing marginal returns, decreasing marginal returns, or constant returns to labor? Explain.

Suppose an increase in the minimum wage has raised your franchise’s labor costs. How do you respond to the higher labor costs? How will the higher labor costs affect your short-run cost curve, long-run average product curve, and average cost curve?

Answer 1

Explicit cost: Electricity cost, labor cost, wages paid, raw materials used

Implicit cost: Return on money obtained had this $1 million been invested somewhere else

As more labor is hired, wages paid to these laborers increases, which is a variable cost, thereby increasing the explicit cost of carrying out operations.

Overtime as more labor is hired, there will be decreasing marginal returns to labor because the efficiency of output produced by each worker increases as more and more laborers are hired and output produced by each falls due to reasons which can be either management issues or coordination issues or free riding.

Increase in minimum wages will increase labor costs and thus input costs. Firms will then respond by reducing output production and thus reduce employment.

High labor cost affects short run cost by shifting it right

Average cost will increase by same amount of increase in labor cost

Long run average product will shift left as output per worker falls