Brieanna Bookter's Budding Bites Experiment

Brieanna Bookter

March 30, 2015

Marginal Analysis

Journal 3

Part one: hypothetical company

Part two: Budding Bites is a company that sells marijuana edibles. The company sells a variety of food products, including the traditional “pot brownie.” Budding Bites’ location is Washington DC. The owners, Will & Grace, opened the shop shortly after marijuana was legalized in The District. Their target demographic is 21 and up sector of the city because you must be at least 21 to possess marijuana in DC. Will & Grace were high school friends and first smoked marijuana together on the tennis courts in their hometown. During college, the two started dating and would always vacation in Amsterdam where they remained high during their entire visit. One time during a creative high in a tulip field in the Netherlands, the two developed their idea for Budding Bites. In 2012, the couple moved to DC and hoped the city would legalize marijuana soon so they could quit their jobs and open up their dream business. In March of 2015, the couple opened Budding Bites.



Budding Bites’ Brownies:

Budding Bites makes 125 Budding Bites’ Brownies per day.

· Total Fixed Costs

o Rent: $2500 a month ($83 a day)

o Utilities: $1500 a month ($50)

o Production supplies: $2500 a month ($83 a day)

· Variable Costs: $25

· Determine the price for which the company sells a unit/quantity of good: $12

· Cost Function: fixed costs (a) + (variable costs (b) * quantity (q))




C(q)= (216)+(25q)



· Find Revenue function

price (p) * quantity (q)

R(q)=pq

R(q)= (12*q)

· Find the Profit function:

P(q)= R(q)-C(q)

P(q)= 1500(q)-3341(q)

· To break even, Budding Bites would need to make and sell at least 279 Budding Bites’ Brownies per day. We know this because the revenue needs to be greater than the cost function value in order for the company to break even. When 279 Budding Bites’ Brownies are sold, the company breaks even, with a profit of $8. So, R(q)=C(q).



·



lBlue line represents revenue function. Red line represents cost function. The blue circle represents the break even point.





· The breaking point would be where the tangent line would hit the cost function. This is the slope of the cost function which then gives us the marginal cost. The slope of the revenue function gives us marginal revenue.



The breaking point is represented by the blue circle. The breaking point shows us that a company breaks even once MC=MR.



· The profit function graph shows that company is not currently making any money because we have a negative value. The company needs to get its profit closer to where the breaking point is on the graph. If the company changed product production or prices of the product, then the profit function would be closer to the breaking point and the company would be making money.

Part 3:

· The company sells 285 Budding Bites’ Brownies a day.



·



The blue circle shows 285 products being sold.



· Because the function is linear, the marginal cost is going to be the same as the cost function. In other words, it is going to cost the same amount of money to produce the nth item as it was to produce the first item. So MC(q)= c’(q)=25

· Average Cost= C(q)/q

$7341/285



AC= $26






1. MC=$25



AC=$26

So, MC is less than AC which means that increasing production decreases average costs.

2. The number of units sold daily is after the break even point. This means that Budding Bites will make a profit everyday that the company is open and selling product.

3. With each increase of products sold each day, the company will continue to make a greater profit. Because the function is linear, the cost of production is constant at any production level. Average Cost will go down per unite made, making more profit. For example, If I were to use the formulas R(q+ 1) – R(q) and C(1+ 1) – Cq) the revenue function is going to be greater than the cost functions.

4. It will decreases the average cost.

5. A company always wants to decrease average costs allows for more opportunity for profit because you aren’t spending as much on the production of your prroducts.

Part 4:

· The company so far is in good standing because the marginal cost of a Budding Bites’ Brownie is less than average costs. This means that the company is making a profit. The product will only continue to become more popular as the brand of Budding Bites is advertised and more and more people accept the legalization of marijuana in DC.

· This company will thrive throughout the next five years. Just as a startup, the company’s MC=25 and the AC= 26, so MC <AC. Socially, this trend will continue for the company because more and more people will begin to accept the legalization of marijuana and try the products. As long as the District does not repeal the legalization laws, Budding Bites will continue to bud.