# Giorgi Pizzeria is a small owner operated restaurant business

November 24, 2016

Giorgi Pizzeria is a small owner operated restaurant business. Giorgio, the owner and manager knows that the fixed cost for his restaurant is \$500 per day and includes rent for building, tools and equipment. Variable costs included: labor, energy and supplies costs. He collected data on output and total average variable cost over a ten day period. (3 pts each)

Day Q AVC

1 76 \$50.26

2 248 30.23

3 492 20.44

4 784 20.04

5 1100 10.82

6 1416 10.69

7 1708 10.64

8 1952 10.64

9 2124 10.69

10 2200 10.82

Where Q is number of pizzas prepared per day.

a. Use the data to run the appropriate regression to estimate the parameters for the empirical cost function: AVC = a + bQ + cQ2

b. Using a 5 percent significance level, discuss the suitability of the parameter estimates obtained in part a. Consider both the algebraic signs and statistical significance of the parameter estimates.

c. Present the estimated average variable cost, total variable cost, and short-run marginal cost functions.

d. At what level of output does AVC reach its minimum value? What is the minimum value

of AVC at its minimum?

6. The company you work for hires labor and capital in competitive factor markets. Currently the wage rate is \$60 per hour and capital is rented at \$120 per hour , if the marginal product of labor is 500 units of output per hour and the marginal product of capital is 750 units per hour , is your company using the cost minimizing combination of labor and capital? If not, should the firm increase or decrease the amount of capital used in its production process. (6 points)

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