Sunday, October 11, 2009

My study methods: Effective?

Must absorb knowledge. Must absorb knowledge.At SOM, our professors are kind enough to supply us with previous years' exams, which is also terribly unkind, as the extra study materials ruin the weekend by (a) taking away excuses to not work, and (b) making John feel stooooopid.

Take Microeconomics. Please! How I cry when I simply cannot proceed with a problem. But practice makes perfect, and now I can invent problems and then solve them! Let's do just that.

Suppose I want to start a business selling chocolate milk. I can produce the milk using a machine that has two speeds, high and low. The fast machine makes 100 gallons/hour and uses $120/hour in labor and 3 oz. of the magic chocolate ingredient per gallon, and the ingredient costs $0.16 an ounce. The slow machine makes only 75 gallons/hour and uses $90/hour in labor and is also crappier; it only uses 2 oz. of the magic chocolate ingredient per gallon. The machine is being lent to me for free for 12 hours/day. How does the market price of chocolate milk determine the speed at which I run my machine?

Funny you should ask:

LO
100 gallons/hour
1200 gallons/day
$1080 labor
$384 ingredient
AVC = $1.22

HI
120 gallons/hour
1440 gallons/day
$1440 labor
$691.20 ingredient
AVC = $1.48

The answer is that you would not start manufacturing this chocolate milk until the market price is $1.22. Then I ought to run at the slow speed and make up to 1,200 gallons/day. I should keep doing that until the market price rose to ($1.48x1440 - $1.22x1200)/(1440-1200) = $2.78. At that point, I should switch to the high technology and run it at full capacity. The reason I need to wait until it gets up that high is because there's an opportunity cost to running at high-speed.

Somebody check my work.

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