Blog #3 Paris Maragkos

Hypothetical Start up Company

Greek Gelato is a startup ice cream business owned by Maragkos brothers and currently operating only in the United States.  The ambitious brothers decided to start up this company and invested a lot of time, effort and money into it. Greek Gelato's fixed costs included monthly rent of $10,000, utilities of $2,000 and wages of $8,000. The company offered only one size of ice cream cup, at a cost of $0.50/ unit and the cost of the ice cream was $0.75/cup. The also, Greek Gelato was selling their ice cream for $4.50 per cup.

Part 2
Fixed Costs of the company:  10,000+2,000+8000 = $20,000
Variable Costs : 0.50+0.75 = $1.25/ice cream cup
Selling Price : $4.50 per unit
Cost function : C(q) = 1.25*q + 20,000
Revenue function : R(q) = 4.5*q
Profit function : P(q) = R(q) - C(q) = (4.5*q) - (1.25*q + 20,000)
Break Even Point : It would be where R(q)=C(q). That point is q=6,154 and $27,693

Break even point is the point where the cost of operating equals the revenue of the company, meaning that R(q) = C(q). That explains why that point is where the two function intercept. The slope of the revenue function has to do with the fact that the company earns $4.5 for every additional unit they sell. Likewise, the slope and the steepness of the cost function have to do with the fact that the company needs to spend $1.5 for every additional unit of ice cream they produce.

The break even point on the profit graph is the point where the profit function touches the x axis. At that point, the company has covered its expenses and any quantity above it will generate profits.
The graph starts at -20,000, because these are the company's fixed costs and then concaves down until the company starts to generate a few revenues out of its operations and then the graph starts concaving up as the company covers more and more of its variable expenses. When the graph hits the x-axis, the company has generate enough revenues to covers its costs and from now on any quantity will generate profits.






Part 3

Ice Creams produced every day: q=1,000

MC = C'(q)
MC = $1,25/ additional unit

C(1,000) = 1.25*(1,000) + 20,000
C(1,000) = 21,250

a (1,000) = 21,250/1,000 = $21,25

1) At q=1000 MR>MC, but the company is still operating at a loss area.
2) It is before the break even point, which means that the company should keep producing more units in order to meet it and begin earning profits.
3)Yes, the company would still make profits since R(1000+1)= $4,504.5 and C(1000+1)-C(1000)= 21,251.25 - 21,250 = $1.25
4) Since MC<AC then an increase in production would decrease the AC
5) A decrease in the AC would be better for the company because it will require them to pay less. This would be the case up to the point where MC=AC, because after an increase in production will result an increase in the company's costs.

Part 4

The company will do really good in the next 5 years because they will be operating in a profit area. As I showed earlier, the company will need approximately 7 days of the month in order to break even, and after that point they will constantly generating profits. Even if they increase their production, their revenues will exceed their costs and maybe a future expansion will be possible