Scenario 1 (length: as needed) A cupcake store is located in a mall and is the only cupcake store in that mall. The demand schedule for cupcakes (per dozen) is given in the table below. If the marginal cost to produce a dozen cupcakes is $4 per unit, how many units should the firm produce? Price Quantity Purchased (Dozen per day) $12 3 $11 7 $10 12 $9 20 $8 35 $7 60 $6 100 $5 160 $4 250 1. What price should the cupcake store charge? 2. If the fixed cost for the firm is $100 per day, how much profit will the firm make in one day? 3. What is the price elasticity of demand at the optimal price/quantity combination (use the next lower price level as the second point in your calculation)? 4. Is the formula for finding the correct level of output on the bottom of page 65 in your text satisfied? MR > MC means that (P-MC)/P > 1/lel Scenario 2 (length: as needed) A restaurant/bar is analyzing its pricing of beer. It has determined that the price elasticity of demand for beer is −0.8, the cross-price elasticity for wine with respect to the price of beer is −0.9, the cross-price elasticity for appetizers is 1.4 and the cross-price elasticity for entrees is 2.2. The current average price of a beer at this bar is $4.50 and the restaurant sells 250 pints of beer a night. The price of wine averages $8 a glass and in a typical night 40 glasses of wine are purchased. An appetizer is priced at an average price of $6 and an entree costs $12 on average. The average number of appetizers and entrees sold per night is 70 and 25, respectively. The marginal cost of a pint of beer is $2, an additional glass of wine sold increases costs by $5, an appetizer increases costs by $4 and an entree has a marginal cost of $7. If the restaurant/bar decides to lower the price of beer by $0.50, by how much does the firm’s profit change and in which direction? Scenario 3 (length: as needed) Consider the market for corn in the United States. Suppose that the mandated percentage of ethanol in gasoline is increased and at the same time a corn blight destroys a significant portion of the corn crop. 1.Using a supply and demand diagram, show what happens to the equilibrium quantity and price of corn in the United States. 2.Explain why you are moving the curve(s) that you are? 3.Using a supply and demand diagram, show how the changes in the corn market would affect the market for wheat (a substitute for corn). Scenario 4 (length: one paragraph) Review the following resources: Website: S&P Case-Shiller 20-City Home Price Index (SPCS20RSA) Website: New One Family Houses Sold: United States (HSN1F) During the housing crash in 2008, housing prices fell, and the number of new houses sold in the United States also fell. The link to “New One Family Houses Sold” does not include existing house sales, but assume that existing house sales fell as well. In the supply and demand framework, what could shift to explain the observations of the housing market? Scenario 5 (length: 0.5 page) A pet store is considering adding an employee discount of 25% off anything in the store to the benefits the employees already receive. What are the long-run implications of adding this benefit to the wages that its employees receive and to the type of applicants that the pet store attracts?
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