University Economics: Production and Cost Minimizing Output Analysis

This assignment analyzes the principles of cost minimization in the context of a small business, specifically Pat's Pizza Restaurant. It explores the concepts of explicit and implicit costs, and how they impact profit maximization. The analysis includes a breakdown of costs, a discussion of how to minimize costs by adjusting input factors (labor and capital), and strategies for improving productivity in both the short and long run. The assignment also provides recommendations for Pat to increase productivity and maximize profits, including decisions regarding plant capacity and technology changes, while emphasizing the importance of managing short-run costs to achieve long-term goals. The report suggests the importance of cost in deciding the pricing policy of the company.

Running head: PRODUCTION AND COST MINIMIZING OUTPUT
PRODUCTION AND COST MINIMIZING OUTPUT
Name of the Student
Name of the University
Author Note:

1PRODUCTION AND COST MINIMIZING OUTPUT
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Answer to Question 1..................................................................................................................2
Answer to Question 2..................................................................................................................2
Answer to Question 3..................................................................................................................3
Conclusion.......................................................................................................................................4
Reference.........................................................................................................................................5

2PRODUCTION AND COST MINIMIZING OUTPUT
Introduction
In economics, the total cost (TC) incurred in the production is the total economic cost of
production. It includes variable cost as well as fixed cost plus the opportunity cost, i.e. the
benefit or value of something that must be given up to acquire something else. Explicit cost are
the cost incurred out of the pocket by the firm such as salaries, rent, wages or material. Implicit
cost are the imputed value of the entrepreneur’s own resources and services. These are the cost
of the factors owned by the entrepreneur himself like capital, inventories and salary of the
entrepreneur (Goerg, Kube & Radbruch, 2019).
Discussion
Answer to Question 1.
In the case of pat’s pizza restaurant following items are categorized as:
1) Explicit Cost
2) Implicit Cost
3) Explicit cost
4) Implicit Cost.
Answer to Question 2.
The problem regarding the cost minimization for Pat’s pizza restaurant is shown below:
a) The above equation is unequal as MPL/W is more than the MPK/R, therefore, the
company is not minimizing cost. To reduce the cost, MPL/W should be equal to MPK/R.

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b) Pat should hire fewer workers and rent more ovens, as this will help in making more
money. More ovens over more labour will decrease the cost of production and thereby
helps in earning more profit.
Answer to Question 3.
For improving restaurant’s productivity, Pat needs to make the following decision
regarding the short-run as well as the long-run. In the short run there is both fixed cost and
variable cost. However, there is no fixed cost in the long run (Chao, 2016). Input cost are the cost
which is incurred in the production process to manufacture goods or to provide a service, such as
raw material, direct labour and factory overhead. Variable cost effects the cost of production
directly in the short-run. Since, fixed cost are distributed in the terms of output produced in the
short run, therefore the input cost that can be fixed in the short run is the cost of the plant and
cost of technology (Bosetti, 2015). Examples of the fixed inputs are office premises, factories,
equiments and building. The input cost that are variable in the long-run are material and labour
cost. Since variable cost is output-sensitive, therefore, they change with a change in the output.
In the long run, all the factors of production changes with the modification that takes place
according to the desired goals of the company. The efficient long-run cost is sustained when the
firm produces the desired quantity at the lowest possible cost. Examples of some variable inputs
that the firm might use in the long-run are the sum of workers and amount of raw materials.
Hence if the firm manages the short-run cost timely, then it is more likely to achieve its long-
term goals by reducing the cost.
The economic decision that can be taken by Pat to increase productivity and maximize
profits (Yang & Ng, 2015) can include the following:

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 Pat can decide to escalate the capacity and size of the plant. By increasing the size and
capacity of the restaurant, the firm will be able to generate more revenue by producing
more outputs.
 Secondly, the firm can decide to change technology. Technological change can improve
efficiency and also technological changes in the areas of transport, logistics and
communication will enhance the productivity of the business.
Conclusion
The above report suggests the importance of the cost of deciding the pricing policy of the
company. It also indicates the importance of fixed cost and variable cost in the short run. The
report also provides a suggestion to Pat regarding the decisions to be taken to improve
productivity and maximize the income of the restaurant in the long-run.

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Reference
Bosetti, V., Marangoni, G., Borgonovo, E., Anadon, L. D., Barron, R., McJeon, H. C., ... &
Friley, P. (2015). Sensitivity to energy technology costs: A multi-model comparison
analysis. Energy Policy, 80, 244-263.
Chao, C. C., Nabin, M., Nguyen, X., & Sgro, P. M. (2016). Wage inequality and welfare in
developing countries: Privatization and reforms in the short and long run. International
Review of Economics & Finance, 42, 474-483.
Goerg, S. J., Kube, S., & Radbruch, J. (2019). The effectiveness of incentive schemes in the
presence of implicit effort costs. Management Science, 65(9), 4063-4078.
Yang, X., & Ng, Y. K. (2015). Specialization and economic organization: A new classical
microeconomic framework. Elsevier.