Question

Laura has been hired to help a struggling winery return to profitability. The winery produces wine using grapes (g) and labor (l). Wine sells at market price, p, grapes are bought at cost r per pound of grapes and workers are paid a wage w per hour. The firm faces fixed costs, F.

1. The winery produces 400 bottles of wine per week and sells them at the market price of p= $30 per bottle. The winery's variable costs for producing wine amounts to $11,200 per week , and the winery must pay a weekly rent of F= $1,000 whether they produce wine or not. If the winery is maximizing profit, should they stay in business or shut down? Explain your answer.

2. If a potential entrant into the wine market is facing similar costs and market prices, should they rent land and enter the market?

3. Laura estimates the winery's production function to be y=6g^1/3l^1/3 and notes that the winery used 1000 pounds of grapes and 512 hours of labor per week last year. Was the winery's production efficient, or inefficient? Explain your answer.

4. Suppose grapes cost r= $20 per pound and workers were paid w= $10 per hour last year. Was the winery's combination of inputs last year profit maximizing? Explain your answer.

5. Was the production plan last year cost minimizing given the firm's output? Explain your answer.

6. If Laura gets the winery to produce efficiently and maximize profits, should they stay in business in the long run assuming prices and costs will remain exactly the same?

Answer 1