Consider a market of two firms with demand given by P = 400 – Q . Each firm has a constant marginal cost of $50.
September 3, 2020
John likes to play futsal (football 5×5).
September 3, 2020

Just up the road from where I live is a bread shop. Like many others, I often buy our bread there on a Saturday morning. Not surprisingly, Saturday morning is the busiest time of the week for the shop and as a result it takes on extra assistants.During the week only one assistant serves the customers, but on a Saturday morning there used to be five serving. But could they serve five times as many customers? No, they could not. There were diminishing returns to labour.The trouble is that certain factors of production in the shop are fixed:o The shop is a fixed size. It gets very crowded on Saturday morning. Assistants sometimes have to wait while customers squeeze past each other to get to the counter, and with five serving, the assistants themselves used to get in each other’s way.o There is only one cash till. Assistants frequently had to wait while other assistants used it.o There is only one pile of tissue paper for wrapping the bread. Again the assistants often had to wait.The fifth and maybe even the fourth assistant ended up serving very few extra customers.I still frequently shop at this same bread shop and they still have only one till and one pile of tissue paper. But now only three assistants are employed on a Saturday! The shop, however, is just as busy.2) How would you advise the baker to extend his shop, thereby allowing more customers to be served on a Saturday morning?

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