The increase in costs and resulting reduction in sales will
lead to a reduction in profit, even though price rose too. The
graph above illustrates this by the change from the green shaded area (before costs rose) to the blue striped area (after profits rose).
15. Due to the increase in the cost of fake butter flavoring and
yellow food coloring the theater will experience:
- an increase in profits from popcorn sales because the demand for
popcorn shifted out. Presumably when people make the decision to purchase popcorn they
don't care about the cost of individual ingredients (though they
may care what those ingredients are) they simply care about the
total price of a tub of popcorn drenched in artificial ingredients.
Thus, the demand for popcorn wouldn't change (though quantity
demanded does as price changes).
- an increase in profits from popcorn sales because the demand for
popcorn shifted back. A reduction in demand would not increase profits. Presumably when
people make the decision to purchase popcorn they don't care about
the cost of individual ingredients (though they may care what
those ingredients are) they simply care about the total price
of a tub of popcorn drenched in artificial ingredients. Thus,
the demand for popcorn wouldn't change (though quantity demanded
does as price changes).
- a reduction in profits from popcorn sales because fixed costs
rose. Fake butter flavoring and yellow food coloring are clearly variable
inputs since the theater only uses them when it makes more popcorn
(we hope). So, an increase in their cost is an increase in the
cost of a variable input.
- a reduction in profits from popcorn sales because variable costs
rose.
- a reduction in profits from popcorn sales because the demand for
popcorn shifted back. Presumably when people make the decision to purchase popcorn they
don't care about the cost of individual ingredients (though they
may care what those ingredients are) they simply care about the
total price of a tub of popcorn drenched in artificial ingredients.
Thus, the demand for popcorn wouldn't change (though quantity
demanded does as price changes).
Next Question
Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved