A private college adds a small café to its building to cater to the needs of its

Question

A private college adds a small café to its building to cater to the needs of its own students. The total cost of the facilities for the café is $100,000. After a year of operations the college determines that operating the café is interfering with its primary business of educating students. A group of enterprising business students offer to purchase the café facilities for $50,000. The college balks at the idea because it had paid $100,000 for the facilities. The college spends $10,000 advertising the café for sale hoping to get an outside buyer willing to pay much more than the students and operate the café on campus. When no outside offer was forthcoming the students increased their offer to $55,000. Should the college take the students' offer? Why or why not? (10 marks) 4. a. Explain why the short run ATC is U-shaped? Explain why the long-run ATC is also U-shaped? How are the two curves different? (10 marks) b.

Explanation / Answer

4.a. The total cost of facilities for the cafe is $100,000. Intially the group of students were interested to take that in purchase at $50,000. But the college thought it had paid $100,000 for this facility. So initially they were not ready to give it. The college spend $10,000 for advertisement. When they saw that no outsiders are coming the students offer extra $5000. In $55,000 the college must give it to students. Because if college do not give it will not get back any kind of return. The college if take the students offer they will get at least $55,000. Otherwise the college will loose the whole amount which it had spend for the facilities for the cafe.

b. The short run ATC curve is U shaped because of mainly the law variable proportion work behind it. According to law of variable proportion of we employ one input keeping other fixed then initially the used input will give increasing return, then it will give constant return then finally it will give negative return. Intially the average cost curve downward because of reduce in cost of production with more output. It happens because the average fixed cost decline with production and average variable cost also decline with production. These two reduction work behind fall in average cost. But after reaching minimum it again starts to increase. It increases because average variable cost start to increase and law variable proportion give negative return in this area. Here in extra input there is decline in output. So here we get increasing cost.

The long run average cost is the envelope of short run average cost. In the long run we divide it in different short run period. In the short run period when we get extra cost or increasing then we move to another plan. It may be plan 2 . In the long run the firm enjoys the economies of scale upto a certain level. As long as it enjoys economies of scale it will have negative slope. After reaching its minimum point again it starts to increase because here it does not enjoy economies of scale. Here we get diseconomies of scale. For this the long run average cost is also U shaped but it is flatter U shaped than SRATC.

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