Answer to Question #159368 in Microeconomics for Roy

Question

Question 01                                         05 Marks                                                                 

The investors of Smith Autos have put up $500,000 to construct a building and purchase all equipment required to wash cars. The investors expect to earn a minimum return of 10% on their investment.  If the money to set up the business had been borrowed from a bank instead, the car wash owners would have paid a 10% interest rate. The car wash is open 50 weeks per year and washes 800 cars per week. Whether operative or not, the company must pay $1,000 per week return to investors and $1,000 per week as insurance. The variable costs for the 800 weekly washes includes $1,000 labour cost and $600 materials cost. There are many car washes of equal quality and service in the area and they charge $5 per car wash.

1. Based on your knowledge of the different forms of market structure, do you think Smith Autos should stay in business? Show calculations.              (2 Marks)
2. Graphically represent the company's performance, showing profit or loss. (1 Mark)
3. Another car wash company operates inside a gated community in the vicinity and offers its services at $6 per wash under a licensed agreement. Highlight how is it possible for this company to charge a higher price than the market and still stay in business.                                         (1 Mark)

After a few mouths, due to the forces of demand and supply, the market price is pushed down to $1.5 per car wash. What course of action will you suggest to Smith Autos?            

Answer 1

Answer:

Step 1

Expenses (every week) 

- Return paid : $1000 

- Insurance paid: $1000 

- Variable expenses brought about : $1600 (work + materials) 

Absolute = $3600 

All out Costs in a year = 3600 x 50 = $1,80,000 

Income (every week) 

No. of vehicle washes every week = 800 

Market cost per wash = $5 

Complete = $ 4000 

Complete Revenue every year = 4000 x 50 = $2,00,000 

Benefit = $20,000 

The organization is as yet procuring benefits of $20,000 every year subsequent to paying all costs brought about in the wake of paying interests and protection. From the highlights referenced, Smith Autos goes under market structure-Perfect Competition. 

In entirely serious market, firms can just experience benefits or misfortunes in the short-run. Over the long haul, benefits and misfortunes are killed in light of the fact that a limitless number of firms are delivering endlessly distinct, homogeneous items. 

Smith Autos should continue running since they are procuring benefits. 

b) 

 

Step 2

c) 

In its advanced structure, a gated local area (or walled local area) is a type of private local area or lodging home containing carefully controlled doors for walkers, bikes, and cars, and frequently portrayed by a shut edge of dividers and wall. A gated local area is an attractive security convenience to most imminent occupants and to most property directors since they can charge a premium for lease. The fundamental reason for a door, on a low-wrongdoing property, isn't to stop or forestall wrongdoing yet to give the view of security and elatedness. 

Thusly, individuals like to remain inside the local area and firms or shops inside these networks get authorized and generally are the solitary firms giving specific merchandise or administrations. They begin to feel and act like imposing business model firms and in this manner can charge marginally higher than shops outside gated networks. 

d) If the market cost of a vehicle wash drops by $1.5 for example becomes $ 3.5. The absolute income of the Smith Autos will be 

Absolute Revenue every year = 50 x 800 x 3.5 = $ 1,40,000 

Absolute Costs every year = $1,80,000 

Misfortune = $40,000 

Since the organizations is causing misfortunes, it is more unsafe to maintain the business and I would propose them to close down else, they will be under tremendous obligation trusting that the market will rise.