This is one of my favorite assignments. Students get the opportunity to be creative and are rewarded for the effort they put in.
The assignment is to create your own firm, explain, chart and graph all of the necessary information in the production function. This can be anything that you like. It works best if you pick something you are interested in, or model it after your place of employment, or what you want to do in the future. In the past I’ve see everything from tattoo parlors to magical brooms, and pretty much everything in between. The only requirement for the output is that it has to be measurable. Since everything has to be measured in terms of costs and labor per unit, it is easiest to have the product be a tangible good (not a service). In the case of the tattoo parlor, the student was able to break down exactly how much ink, paper, cleaning solution, pens, plastic wrap, electricity, etc. would be used per artist on a 15 min interval.
I encourage everyone to be creative, and stay away from baking, restaurants, juice bars, etc. Again, be creative! Produce something that I will be excited to read. It is great if this is something that you are already interested in, so you can have an idea of how realistic your dreams might be.
The great thing about this project is that you can put in as much as you would like, and your grade is based accordingly. Here is the minimum that you have to do:
1. Tell the story of your firm. What is the name of the firm? What do you produce? Where is your market? You must have a minimum of 10 employees and output of at least 100 units per month.
What are your inputs (capital, labor and materials) and your output?
2. Short Run Production Function and Total Product curve. You will need words, a chart and a graph here. Next, be sure to do the same for average and marginal product of labor. Explain what is going on in your graphs.
3. Short Run Costs: List all of the costs associated with your firm. Separate them into fixed and variable costs. Add them up and get your total costs. Calculate your average costs and your marginal costs. You will need a minimum of two graphs here. One for your total costs (TC, TVC & TFC), and one for your average/marginal costs (ATC, AVC, AFC & MC).
4. How much are you selling your product for at the profit maximizing price? How many units? What is your total revenue? What are your explicit & implicit costs? What are your accounting and economic profits at the end of the first year (these might be negative, and that’s ok). How long will it take you to break even, or turn a profit?
5. Do the same for the long run. What are your returns to scale?
*** You may not use Excel to create the graphs. You must create them yourself by hand and write in some of the important points (where TP is maxed, start/finish points, inflection points, minimums, points where two curves intersect, etc.***
Upload one completed PDF for submission.
Be sure to check that you upload the correct file.
Be creative and very detailed to increase your grade!