Answer to Question #113978 in Microeconomics for Raashi

Question

a) Suppose you walk into a large supermarket at 2am with a friend.Your friend says, "I can't believe that these stores stay open all night. Only one out of fifteen checkout lines is open. There can't be more than ten shoppers in this store. It just doesn't make any sense for this store to be open all night." What conditions must be true for it to be to the advantage of the supermarket to stay open all night? (13 marks)
b) Your friend has a large garden and grows fresh fruit and vegetables to be sold at a local "farmer's market." Last year your friend was the only worker in the garden, without any additional workers. However, this year your friend hired a worker and production more than doubled. He comments “Next summer, I think I'll hire another two workers (so total workers including myself would go up from 2 to 4) and my output should again more than double". Is it likely that he could hire more workers and always continue to reap greater than proportional increases in production? Why

Answer 1

a)

Answer: In order for the supermarket to operate throughout the night and not have a temporary shutdown then it’s total revenue at night must equal or exceed it’s variable costs that were incurred from staying open in those additional hours that is; electricity, wages of night shift workers and other variable costs.

2. Are the costs of rent, equipment, fixtures, salaries of management, and so on, relevant when the supermarket makes the decision whether to stay open at night?

 

Answer: No. These costs are fixed costs or sunk costs — costs that cannot be recovered even if the supermarket chooses not to operate at night.

 

3. If the supermarket had the same number of customers during its daytime hours as you observed during its nighttime hours, do you think it would continue to operate?

Answer: It is unlikely. This is because the temporary shut-down decision (staying open additional hours at night) depends on whether total revenue equals or exceeds variable costs, but the decision to remain in the market in the long-run depends on whether total revenue equals or exceeds total costs. It is unlikely that the revenue earned at night covers total costs (both fixed and variable costs). 

b)Answer: No. At some point, if any input is fixed (say the size of the garden) the firm will experience diminishing marginal product of the variable inputs. That is, at some point, the garden will become crowded and additional workers will add smaller and smaller amounts to output.