Alizon Fularon

Econ 12

February 23, 2005

That’s the Way the Cookie Crumbles

There once was a girl named Betsy who loved to make cookies for everyone. One day it was her neighbor’s birthday so Betsy decided to bake her neighbor a batch of cookies as a gift. The neighbor always loved Betsy’s cookies and thought of a great idea. He called little Betsy over and told her, “I’ve always loved your cookies, Betsy, but maybe instead of giving them for free, you can sell them to make some money. Here’s ten dollars to start you off.”

Little Betsy thought about the idea for a moment. If she started selling her cookies instead of giving them away for free, she’d be making a profit. But she then realized she’d have opportunity costs. Spending all that time baking would leave her no time to play with her dolls and other friends which were implicit costs. It also meant she had to buy more supplies which were her explicit costs. After weighing out the costs to determine whether she’d be making a profit, Betsy thanked her neighbor and was off to the grocery store to buy more supplies for her new-found business.

After Betsy collected all her supplies, she proceeded to make as many batches of cookies as she could. She decided to sell a dozen cookies for six dollars. She had no fixed costs because she sold it from her home. Her variable costs were the costs of her supplies which was around four dollars. So she determined that her total cost would be four dollars with a profit of two dollars.

As more customers demanded for more of Betsy’s scrumptious cookies, she began to panic because she knew she could not do it alone and deliver the cookies on time. She could only make thirty cookies when working on her own. Therefore she came up with a plan to hire some of her friends to help her. She decided to pay each one two dollars each day. Her fixed costs became one dollar each worker while her variable costs rose to buy more supplies.

When Betsy made a graph of the outcome of her cookies she noticed the production function of her graph becomes flatter. She was perplexed and decided to find out the solution. She figured out that the reason for the flatness was as she hired more of her friends to work for her, the marginal product declined. Betsy drew up a chart from her experiment.

 # of workers Output (quantity/ hour) Marginal Product of Labor Cost of Factory Cost of Workers Total Cost 0 0 \$0 \$0 \$0 1 30 30 \$0 \$1 \$1 2 60 30 \$0 \$2 \$2 3 100 40 \$0 \$3 \$3

The cause of the occurrence was explained to Betsy as diminishing marginal product.

Another aspect Betsy noticed after making a total cost curve that the total-cost curve got steeper as the quantity of cookies increased also due to the diminishing marginal product.

She was ecstatic to learn this concept of economics just by opening up her own, small cookie delivery business. This business made her excited to learn about other concepts of economics, but she also was excited to see her cookie delivery business become more popular and popular.