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The Palms Dry Cleaning Shop in Fort Lauderdale, Florida, faces a highly seasonal demand for its services, as the snow-birds retirees flock to Florida in mid-fall to enjoy the mild winter weather and then return to their main homes in mid-spring. Given this seasonality, Palms tries to keep the overhead costs as low as possible and therefore, often uses seasonal contracted labor to man its operations. The following table shows the labor costs in each month of operation over the past 12 months as well as the total number of garments that were dry-cleaned in each month. Palms pays fixed wages per hour to each employee, and we can assume that the costs of other variable inputs (such as chemicals, electricity, etc) have remained constant.

Month

TVC ($)

Garments cleaned

June

July

August

September

October

November

December

January

February

March

April

May

35,490

42,470

48,980

52,530

37,480

33,510

31,850

27,860

22,160

19,520

25,960

32,980

4,500

5,575

6,300

6,525

5,325

4,050

2,850

2,450

1,525

925

1,925

3,500

a. Derive average variable cost (AVC) data from the data in this table.

b. Use gradient analysis to provide an estimate of eleven data points that seem to represent the MC curve over this range of outputs. Plot these data points and sketch in estimated MC and AVC curves that seem to best fit these data points.

c. Suppose that demand is estimated to move from its present (May) level of 3,500 units to 4,000 units next month (June). What is the incremental cost of meeting this demand?

d. Assuming that Palm's price to dry clean a garment has been constant at $15 over the past year, and will remain at that level, what contribution to overheads and profit can it expect in June?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9743808

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