Econ 3310 Microeconomics Spring 2021 David Quigleygroup Report 3 ✓ Solved

ECON 3310 – Microeconomics Spring 2021 – David Quigley Group Report 3 – Due Monday, April 19th Write a minimum of 4 pages, double-spaced, answering the questions below. If you include figures, those count towards the page minimum. Be as specific as possible and always include explanations that describe your reasoning. Suppose you’re writing a report for the CEO of a theme park entertainment company. The CEO has the following questions she would like analyzed and answered as well as possible.

1. The company is considering production decisions in the short-run and the long-run. In economics, what defines the short-run period from the long-run period? How do the considerations and actions available in the short-run differ from those in the long-run? How might these differences affect production decisions?

2. What are Returns to Scale in relation to the production function? How could you go about evaluating the Returns to Scale for a particular production process? How could you determine if it is Increasing Returns to Scale, Decreasing Returns to Scale, or Constant Returns to Scale? a. What is the Returns to Scale for the production function Q = 12L + 15K, and explain how you determined it? b.

What is the Returns to Scale for the production function Q = 27L2K, and explain how you determined it? 3. What is Marginal Revenue and how do you calculate it? Suppose the Price Elasticity of Demand in the market for theme park entertainment is −1.34. If the CEO is interested in increasing revenue, how should the company adjust the price it charges for entry into its theme parks, and hence, the quantity of tickets sold?

What is the relationship, in general, between the Price Elasticity of Demand and Total Revenue? 4. What is the difference between Variable Costs and Fixed Costs? What goes into calculating Total Costs? a. If the Total Cost function is TC = 4Q3 – 33Q2 + 48Q + 2,600, what are the Variable Cost function, Fixed Costs, Average Total Costs, and Average Variable Costs?

5. What is the Law of Diminishing Marginal Returns? What factors determine the Demand for Labor? What is the relationship between the Law of Diminishing Marginal Returns and the Demand for Labor in the short-run? a. What factors shape the Supply of Labor?

What causes the Supply of Labor to be upward sloping? 6. How do the assumptions behind Perfect Competition affect the structure of the market? What is the relationship between the market price and the firm’s demand curve? What is the profit maximizing quantity for a firm under Perfect Competition?

What are the conditions that govern whether a firm should operate in the short-run or not? ECON 3310 – Microeconomics Group Report 3 – Due Monday, April 19th

Paper for above instructions

Group Report 3: Microeconomic Concepts in Theme Park Management

Introduction

This report addresses a series of microeconomic concepts crucial to production and pricing decisions within a theme park entertainment context. Covering both theoretical foundations and practical applications, the insights provided here will guide the CEO in making informed decisions that align with economic principles.

1. Short-run vs. Long-run Production Decisions

In microeconomics, the distinction between the short-run and long-run is nuanced. The short-run is defined as a period during which at least one factor of production is fixed, typically capital, while other factors such as labor can be varied (Mankiw, 2014). Conversely, in the long-run, all factors of production can be adjusted, meaning the firm can achieve optimal scaling and resource allocation.
The considerations in the short-run largely involve adjusting variable inputs, such as hiring additional workers, which can affect output without altering fixed costs (Baye, 2013). For example, a theme park can hire more staff to handle increased visitor flow during peak seasons but cannot quickly expand its physical space. In contrast, long-run decisions could involve significant investments in infrastructure or technology, such as new rides or attractions, impacting both capacity and operational efficiency (Varian, 2014).
These differences significantly influence production decisions. In the short run, the theme park might focus on staffing levels and operational hours, while in the long run, it would consider capital improvements, long-term contracts with suppliers, and pricing strategies to enhance competitive advantage (McGuigan et al., 2015).

2. Returns to Scale

Returns to Scale refers to how output changes as all inputs are increased proportionately (Garrison et al., 2012). Evaluating Returns to Scale requires examining the production function and determining whether outputs increase, decrease, or remain constant as inputs grow.
a. For the production function \( Q = 12L + 15K \):
To find Returns to Scale, we scale both inputs by a factor \( t \) (i.e., \( L \) becomes \( tL \), and \( K \) becomes \( tK \)):
\[ Q = 12(tL) + 15(tK) = t(12L + 15K) \]
Since output scales linearly with input, this function exhibits constant returns to scale.
b. For the production function \( Q = 27L^2K \):
Scaling inputs by \( t \):
\[ Q = 27(tL)^2(tK) = 27t^3L^2K \]
This signifies that when input increases are made, output increases by a factor of \( t^3 \). Therefore, it indicates increasing returns to scale.

3. Marginal Revenue and Pricing Strategy

Marginal Revenue (MR) is defined as the additional revenue gained from selling one more unit of a good or service. It is calculated by the formula:
\[ MR = \frac{\Delta TR}{\Delta Q} \]
where \( TR \) represents total revenue and \( Q \) is the quantity sold (Pindyck & Rubinfeld, 2013).
Given the price elasticity of demand for theme park entries is \(-1.34\), we assess the optimal pricing strategy. Since the demand is elastic (absolute value greater than 1), increasing prices may lead to a disproportionate decrease in quantity sold, thereby reducing total revenue. Hence, the CEO should consider lowering the ticket price to increase total revenue, leveraging the inverse relationship between price and quantity sold in elastic markets (Stiglitz & Walsh, 2014).
In general, total revenue (TR) moves inversely to price when the absolute elasticity is greater than 1, evident here with the given elasticity value (Varian, 2014).

4. Variable Costs vs. Fixed Costs

Variable Costs (VC) fluctuate with production levels, such as costs for materials and labor, while Fixed Costs (FC) remain constant regardless of the output level, such as rent and insurance (Pindyck & Rubinfeld, 2013).
Total Costs (TC) is calculated as:
\[ TC = FC + VC \]
Given the TC function:
\[ TC = 4Q^3 - 33Q^2 + 48Q + 2600 \]
To isolate VC, we ignore the constant term:
\[ VC = 4Q^3 - 33Q^2 + 48Q \]
Thus, \( FC = 2600 \).
Average Total Costs (ATC) can be computed as:
\[ ATC = \frac{TC}{Q} = \frac{4Q^3 - 33Q^2 + 48Q + 2600}{Q} = 4Q^2 - 33Q + 48 + \frac{2600}{Q} \]
Average Variable Costs (AVC) is similarly calculated as:
\[ AVC = \frac{VC}{Q} = \frac{4Q^3 - 33Q^2 + 48Q}{Q} = 4Q^2 - 33Q + 48 \]

5. Law of Diminishing Marginal Returns

The Law of Diminishing Marginal Returns states that as one input is incrementally increased while others remain constant, a point will be reached where additions yield progressively less output (Mankiw, 2014). In the short-run, the demand for labor is influenced by the marginal product derived from hiring additional workers.
a. Factors that shape the supply of labor include wage rates, working conditions, and alternative employment opportunities. The supply of labor tends to exhibit an upward slope; as wages increase, more individuals are inclined to seek employment, drawn by higher potential earnings.

6. Perfect Competition

Under Perfect Competition, many firms sell identical products, leading to market prices that reflect marginal costs. Here, a firm's demand curve is perfectly elastic, and the optimal production quantity is determined where marginal cost (MC) meets marginal revenue (MR) (Garrison et al., 2012).
A firm should consider operating in the short-run if the price exceeds average variable costs, despite the price potentially being below average total costs. This indicates the firm covers its variable costs and contributes to fixed costs, even at a loss.

Conclusion

The economic principles outlined above provide strategic insights for the theme park company's short-run and long-run production decisions, evaluate returns to scale, optimize pricing strategies, and understand cost structures essential for operational success. By leveraging these principles effectively, the park can enhance profitability while maintaining customer satisfaction.

References

1. Baye, M. R. (2013). Managerial Economics and Business Strategy. McGraw-Hill.
2. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2012). Managerial Accounting. McGraw-Hill.
3. Mankiw, N. G. (2014). Principles of Microeconomics. Cengage Learning.
4. McGuigan, J. R., Moyer, R. C., & Harris, F. H. (2015). Managerial Economics. South-Western.
5. Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics. Pearson.
6. Stiglitz, J. E., & Walsh, C. E. (2014). Principles of Microeconomics. W.W. Norton & Company.
7. Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.
8. Besanko, D., Dranove, D., & Shanley, M. (2013). Economics of Strategy. Wiley.
9. Salvatore, D. (2015). Microeconomics: Theory and Applications. Oxford University Press.
10. Kreps, D. M. (2013). Microeconomics. Springer.
This framework serves as a foundational understanding of critical microeconomic concepts, tailored specifically to the operations and management of a theme park, aiding strategic decision-making processes.