Competency

In this project, you will demonstrate your mastery of the following competency:

• Determine the impact of economic costs on organizational and individual decision making

Scenario

You work for Orizont Consulting, an economic consulting firm. In casual conversation with your cousin Daniel, he mentioned that he’s weighing several decisions around his own small business, which is a coffee-roasting factory in his hometown. Given your line of work, he’s asked if you would be willing to do him a favor by bringing an economics perspective to his business.

Business has been going very well for Daniel. The shop is always busy, and he’s recently hired two new temporary employees. However, he hasn’t seen much of an increase in profits. He’s looking for ways to maximize his profits, as he is considering quitting his job to run the business full-time.

Directions

Part 1: Letter and Financial Data
After your conversation with Daniel, you’ve promised to look over his financial information and write him a letter with some recommendations.

*Note that for this part of the project, you will submit both your letter (as a 250- to 300-word Microsoft Word document) and your completed Financial Data spreadsheet.

1. As your work on your recommendations for Daniel, assume that his business is in a perfectly competitive market.
2. Daniel has recently hired two temporary employees, but he isn’t sure if he has the right number of workers. To help Daniel calculate how many employees he needs, complete the Marginal Product of Labor tab in the Financial Data spreadsheet (located in the Deliverables section) and address the following:
   • Determine the marginal revenue product of labor for workers in the organization, given the wage rate. For each additional labor input Daniel adds, how much additional revenue does he get?
   • Determine how many workers Daniel should employ, explaining the impact of the marginal revenue product of labor on organizational decision making.
     • How many total worker should Daniel employ?
     • Why does an organization stop hiring workers? Make sure you explain the concept of diminishing return.
3. Daniel is considering the cost of running the business and whether or not he should quit his day job as a customer service specialist earning $45,000 annually. To help Daniel make this decision, answer the following:
   • Categorize the economic costs below as fixed or variable in the short run. Explain your rationale for each one and whether or not they will differ in the long run:
     • Rent
     • Wages
     • Raw materials
     • Energy costs
     • Phone and internet services
   • Complete the Daily Production Cost Schedule tab in the Financial Data spreadsheet to determine the annual profit/loss of Daniel’s business based on profit-maximizing production. Include the following in your response:
     • What is the annual profit/loss of Daniel’s business?
     • What is the profit-maximizing production level? Explain the process you followed to determine the profit-maximizing production level (quantity).
     • What would happen if Daniel produces above that amount?
   • Using your findings above, determine whether or not Daniel should quit his job as a customer service specialist, referencing the concepts of opportunity cost and economic profit. Assume Daniel operates his factory five days a week and works as a customer service specialist five days a week as well.

Part 2: Email
After reading your letter with your recommendations, Daniel has sent you an email expressing some concerns about the future state of his business. Recent events have made him think that the costs of running his business will increase. He has asked you to reply to his email and explain how he can manage his costs in the long run. Use microeconomics terms and concepts, and in your 250- to 300-word response, make sure you address the following scenarios that Daniel has sent you:

• I see that wages are going up and the price of machines is going down. What should I do in the future? Why?
• Other people are making more money than me in this industry, even though they have bigger operations. Why are they making more money if they have to pay more workers and buy more equipment?