Firms’ costs, revenue and objectives — practice question

Vanilla is used to make soft drinks, cakes and perfumes. Its chief use, though, is in ice cream production. Fig. 1 illustrates the different costs of making ice cream for one firm. Fig. 1 shows the costs of producing ice cream for one firm. The diagram labels are: raw materials including vanilla; wages; insurance; security; rent; lighting; other. Madagascar is the world’s biggest supplier of vanilla, with Mexico and Tahiti next. At the beginning of 2016, economists forecast that the price of ice cream would rise because the price of vanilla had increased by 130% in 2015. This was mainly due to poor harvests in Madagascar, which cut vanilla output in 2015. In most countries, ice cream is regarded as a luxury good. It has many substitutes, and this is one reason why producers do not always pass higher costs on to consumers. In 2015, several other changes affected ice cream production, including an increase in worker productivity. Alongside vanilla, Madagascar makes a number of other primary products such as coffee and sugar. Almost 80% of the country’s labour force works in the primary sector. The country has a fairly low Gross Domestic Product (GDP) per head and a fairly low Human Development Index (HDI) value, as shown in Table 1. This restricts how much people in Madagascar save. Table 1 shows GDP per head and HDI for selected countries in 2015.