Reference no: EM132414942
A consulting firm has just finished a study for a manufacturer of wine. It has been determined that an additional man-hour of labor would increase wine output by 250 gallons per day. Adding an additional machine-hour of fermentation capacity would increase output by 2000 gallons per day. The price of a man-hour of labor is $25 per hour. The price of a machine-hour of fermentation capacity is $50.00 per hour.
a. Is there a way for the wine manufacturer to lower their total costs of production for producing this same level of output? Explain using the appropriate equation.
b. Illustrate graphically and explain your advice to the manufacturer, who by the way knows very little economics and is a bit tipsy from all the wine.
c. Trace out the expansion path and explain how it relates to the long run average cost curve. Show the expansion path and the resulting long run average cost curve.
d. Suddenly sales of your wine plummet and you want to reduce your production. You cannot change your capital input at this point in time. Using the same graph as above, illustrate how you will produce less output and explain what impact this will have on your input combination compared to points along the expansion path.
e. Remembering that there is a different plant size, short-run ATC, associated with every point on the long-run average cost curve, show the differences in the cost of production when you reduce production when sales plummet, relative to the cost minimizing point.