Unit VII Final Project

Unit V Assignment Worksheet

Charles Bunn

James Yoo

Principles of Microeconomics (BBA 2501)

March 28, 2021

From the calculations, Ruby Red Movie Theater incurs a fixed cost everyday irrespective of whether they are selling goods at the

concession stand or not. However, with the increase in the number of units sold, the fixed cost reduces. This means that a higher number

of products leads to a reduction in fixed costs. However, at zero production and 100 units, the theater is experiencing losses. This means

that these two levels should be avoided. The variable cost in the concession stand is increasing with the number of units sold. This is

because growth in these numbers requires more labor. Therefore, the average product increases with the increase in the number of

products placed in the stand.

The fixed cost remains constant throughout the number of units produced. However, the total cost has an increasing trend. This is

because the variable cost increases due to the rise in the number of employees. Irrespective of this trend, the profits increase to a level

where the number of units produced is 1,280. At this point, the profits are at $6,080. Beyond this number of production units, the profits

start going down. This is because the variable costs increase with the increase in the number of employees while the number of units

increasing or being bought is too low to make a difference. Therefore, the cost per unit is higher compared to the marginal revenue being

realized. Increasing the number of workers at the optimum production capacity would also lead to poor profits because of a high variable

cost. The marginal revenue remains constant because the revenues' changes are directly proportional to the changes in the number of

units produced. However, the marginal cost varies with the changes in the total cost and the units produced.

In this theater, the maximum production level where the profits will be maximized is when selling 1,280 units with 18 employees.

This is shown by the fact that at this level the profit is at maximum. This cost of goods sold, and the expenses give the highest amount in

terms of proceeds. However, at this point, also, the marginal cost and marginal revenue are the same. This means that when the theater

has reached this point, it has reached the maximum point. If they try to sell an additional unit, the marginal cost will exceed the produced

revenue, which will reduce the profits (Bowen & Chudleigh, 2019). It is, therefore, advisable to not produce an extra unit after attaining

this level. In a market, when the marginal revenue is greater than the marginal cost, it shows that the theater is making profits. Therefore,

it is essential to maximize the profit for better performance. Having a higher marginal cost than the marginal revenue would mean that

the theater is spending more and gaining fewer profits. This is why the company at the level above 1,280 units has started experiencing a

reduction in the profits. The problem is that the average variable price after this level starts to take an upward trend. The average fixed

cost is also no longer declining, meaning that producing more units does not reduce the fixed costs per unit. The average total cost,

therefore, increases. Therefore, this means that the theater is starting to experience an increase in the cost of producing more units.

However, the marginal cost is also increasing at a high margin. From 1,280 units, the next production level is 1,289. This is an increase

of 9 units. However, the marginal cost increases from $8.0 to $24. This is an increase of $16. Tying to reduce the number of units to the

optimum production level and increase the number of employees again negatively impacts the profits. This is because the marginal cost

becomes a negative value, while the marginal revenue remains constant. Therefore, the theater should have 18 employees and sell 1,280

units for $8.0.

A profit-maximizing firm faces a price that is equal to the marginal cost. This is because above this price; then the firm is forced

to increase profits through an increase in output. A price below the marginal cost means that the firm will be forced to lower the output to

increase profits. In this case, the Ruby Red Movie Theater will decide to shut down in the short run when the price is less than the

average variable cost (Hall, 2018). This is because, at this point, it will be operating in total loss. For example, using figure 1, let P be the

optimum price level of $8.0, quantity sold is Q. the marginal cost is equal to the average total cost. Therefore, selling the products at a

price of P1, which is $6.0, would mean that the marginal cost declines and the quantity sold. However, the average total cost is high

hence lowering profits significantly.

Figure 1

References

Bowen, M. K., &Chudleigh, F. (2019). Productivity and profitability of alternative steer growth paths resulting from accessing high-

quality forage systems in northern Australia's subtropics: a modelling approach. Animal Production Science, 59(9), 1739-1751.

Hall, R. E. (2018). New evidence on the markup of prices over marginal costs and mega-firm’s role in us economy (No. w24574).

National Bureau of Economic Research.

Appendix

Round These Answers to the Nearest Whole Number Round These Answers to the Nearest Penny

Output (Concessio

n Stand Items)

Number of

Workers Employe

d Per Day

Price of

Labor Per

Worke r Per Day

Total Variabl e Cost

of Labor

Total Fixed Costs Per Day

Total Cost Per Day

Average Price of

Concessio n Stand Items

Total Revenu

e Profit

Averag e

Variabl e Cost

Averag e Fixed

Cost

Averag e Total

Cost Margin al Cost

Margina l

Revenu e

0 0 $120 0 $2,00

0 $2,00

0 $8.00 0

$- 2,000

- - - - -

100 2 $120 $240 $2,00

0 $2,24

0 $8.00 $800

$- 1,440

$2.4 $20.0 $22.4 $2.4 $8.0

400 4 $120 $480 $2,00

0 $2,48

0 $8.00 $3,200 $720 $1.2 $5.0 $6.2 $0.8 $8.0

750 6 $120 $720 $2,00

0 $2,72

0 $8.00 $6,000

$3,28 0

$1.0 $2.7 $3.6 $0.7 $8.0

900 8 $120 $960 $2,00

0 $2,96

0 $8.00 $7,200

$4,24 0

$1.1 $2.2 $3.3 $1.6 $8.0

1,025 10 $120 $1,200 $2,00

0 $3,20

0 $8.00 $8,200

$5,00 0

$1.2 $2.0 $3.1 $1.92 $8.0

1,125 12 $120 $1,440 $2,00

0 $3,44

0 $8.00 $$9,000

$5,56 0

$1.3 $1.8 $3.1 $2.4 $8.0

1,200 14 $120 $1,680 $2,00

0 $3,68

0 $8.00 $9,600

$5,92 0

$1.4 $1.7 $3.1 $3.2 $8.0

1,250 16 $120 $1,920 $2,00

0 $3,92

0 $8.00 $10,000

$6,08 0

$1.5 $1.6 $3.1 $4.8 $8.0

1,280 18 $120 $2,160 $2,00

0 $4,16

0 $8.00 $10,240

$6,08 0

$1.7 $1.6 $3.3 $8.0 $8.0

1,290 20 $120 $2,400 $2,00

0 $4,40

0 $8.00 $10,320

$5,92 0

$1.9 $1.6 $3.4 $24.0 $8.0

1,289 22 $120 $2,640 $2,00

0 $4,64

0 $8.00 $10,312

$5,67 2

$2.0 $1.6 $3.6 $-240 $8.0

1,280 24 $120 $2,880 $2,00

0 $4,88

0 $8.00 $10,240

$5,36 0

$2.3 $1.6 $3.8 $-26.7 $8.0

Questions: Use your responses to these questions to help you formulate ideas for writing your Unit V Essay.

Answer these 6 questions using the completed table above

Question 1: What is the level of profit that is made by Ruby Red Movie Theater if 2 workers are employed at the concession stand and only 100 items of output are produced (sold) at the concession stand?

Answer: At this level, the company made a loss of $1,440

Question 1a: Should Ruby Red Movie Theater continue to operate the concession stand if only 100 concession stand items are being produced (sold) by 2 workers? Why, or why not?

Answer: No. At this level, the theater will be operating at a loss which would mean more lost revenue

Question 2: If Ruby Red Movie Theater wanted to produce (sell) 1,290 items from the concession stand, would profit be maximized? Why, or why not?

Answer: No. at this level, the theater would increase its variable costs and hence the total cost. The profits will thus be lowered

Question 3: At what level of output and labor input are concession stand profits maximized for Ruby Red Movie Theater? What are two ways you could tell if this was correct from the table data?

Answer: At an output level of 1,280 units and 18 employees the profit is maximized. This is because the profits are highest at this level. The

marginal cost is also equal to marginal revenue meaning that is the maximum profit.

Question 4: How are average total cost and marginal cost related to marginal product and average product?

Answer: They are related in that they are used to show the maximum production levels needed to enhance profitability.

Question 5: What do you notice about marginal revenue and the price of output (average price of concession stand items in this case)?

Answer: These two are the same and remain constant

Question 6: What is the maximum level of profit that can be generated from concession stand items?

Answer: The maximum profit is $6,080