Executive Summary
Aqua Han is a proposed Hwaseong-based producer of affordable, label-free 500 mL bottled water. Modeled as a price-taking firm in perfect competition, the company maximizes profit by employing seven workers and producing 97,000 bottles per month at the market price of ₩500.
Company and Product
Aqua Han Pure Water is purified Korean drinking water sold in clear, label-free 500 mL PET bottles. Product information is placed through a QR code on the cap and outer packaging. The initial market consists of school cafeterias, offices, fitness centers, event organizers, small retailers, and convenience stores in Seoul and Gyeonggi.
Why this market approximates perfect competition
- Many competing producers supply bottled water nationwide.
- Highly standardized product: 500 mL of purified water is nearly identical across brands.
- Consumers can easily compare prices online and in stores.
- Individual small firms have very little control over the market price.
- Aqua Han must accept the market price, it is a price taker.
- Free entry and exit: firms enter when economic profit is available and exit when long-run losses persist.
Branding does create some real-world product differentiation (e.g., Jeju Samdasoo's volcanic-source image). This project nonetheless models Aqua Han as a price-taking firm in perfect competition.
Market and Competitors
Aqua Han is a price taker. The market sets the price, so for every bottle sold:
| Brand | Product | Sales indicator | Package-price observation | Approx. unit price | Market position |
|---|---|---|---|---|---|
| Jeju Samdasoo | 500 mL bottled water | ≈ 40.4% market share | ₩22,800 for 40 bottles | ≈ ₩570 | Market leader |
| Icis 8.0 | 500 mL bottled water | ≈ 12.6%–13% market share | ₩16,060 for 20 bottles | ≈ ₩803 | Major national competitor |
| Baeksansu | 500 mL bottled water | ≈ 7.4%–8.3% market share | ₩15,260 for 40 bottles | ≈ ₩382 | Value-oriented national competitor |
| Aqua Han | 500 mL label-free bottled water | New market entrant | Target ₩10,000 for 20 bottles | ₩500 | Affordable regional entrant |
Note: Market share is used as the most reliable publicly available sales indicator because audited brand-level unit sales are not consistently available. Online prices vary by retailer, shipping, package size, and promotion.
Location and Operating Assumptions
Aqua Han operates a simulated factory and warehouse in Hwaseong, Gyeonggi-do: approximately 353 m² (107 pyeong), monthly rent ₩3,000,000, security deposit ₩30,000,000. The Korean government start-up grant covers the deposit and most start-up equipment, so the deposit is not counted as a monthly cost.
| Fixed cost item | Monthly amount |
|---|---|
| Factory rent | ₩3,000,000 |
| Utilities & other fixed (20% of rent) | ₩600,000 |
| Security deposit (grant-funded) | ₩0 |
| Total fixed cost | ₩3,600,000 |
Labor costs
| Component | Rate | ₩ per hour |
|---|---|---|
| Base minimum wage | ₩10,320.00 | |
| National Pension Fund | 4.5% | ₩464.40 |
| National Health Insurance | 3.545% | ₩365.84 |
| Long-Term Care | 6.405% | ₩661.00 |
| Employment Insurance | 1.1% | ₩113.52 |
| Industrial Accident Insurance | 1% | ₩103.20 |
| Total employer contributions | 16.55% | ₩1,707.96 |
| Loaded hourly cost | ₩12,027.96 | |
| Monthly cost per worker (176 h) | ₩2,116,920.96 |
Raw materials
| Material component (per completed bottle) | Cost |
|---|---|
| PET bottle, cap, purified water, sanitation, outer-case allocation (before waste) | ₩164.00 |
| Required 10% waste and loss | ₩16.40 |
| Effective raw-material cost per completed bottle | ₩180.40 |
This is a transparent simulation assumption for a small producer purchasing packaging in bulk.
Total Product Table and Total Product Curve
| Workers | Total product / month | MPL |
|---|---|---|
| 0 | 0 | N/A |
| 1 | 12,000 | 12,000 |
| 2 | 28,000 | 16,000 |
| 3 | 48,000 | 20,000 |
| 4 | 66,000 | 18,000 |
| 5 | 80,000 | 14,000 |
| 6 | 90,000 | 10,000 |
| 7 | 97,000 | 7,000 |
| 8 | 101,000 | 4,000 |
| 9 | 103,000 | 2,000 |
Marginal Product of Labor
Specialization causes MPL to rise for the first three workers. After the third worker, the fixed factory space and bottling equipment become constraints. Additional workers still increase total production, but each adds less output than the previous worker. This demonstrates diminishing marginal returns.
Fixed, Variable, and Total Costs
| Workers | Output | Fixed cost | Labor cost | Materials | Variable cost | Total cost | MC / bottle |
|---|---|---|---|---|---|---|---|
| 0 | 0 | ₩3,600,000 | ₩0 | ₩0 | ₩0 | ₩3,600,000 | N/A |
| 1 | 12,000 | ₩3,600,000 | ₩2,116,921 | ₩2,164,800 | ₩4,281,721 | ₩7,881,721 | ₩356.81 |
| 2 | 28,000 | ₩3,600,000 | ₩4,233,842 | ₩5,051,200 | ₩9,285,042 | ₩12,885,042 | ₩312.71 |
| 3 | 48,000 | ₩3,600,000 | ₩6,350,763 | ₩8,659,200 | ₩15,009,963 | ₩18,609,963 | ₩286.25 |
| 4 | 66,000 | ₩3,600,000 | ₩8,467,684 | ₩11,906,400 | ₩20,374,084 | ₩23,974,084 | ₩298.01 |
| 5 | 80,000 | ₩3,600,000 | ₩10,584,605 | ₩14,432,000 | ₩25,016,605 | ₩28,616,605 | ₩331.61 |
| 6 | 90,000 | ₩3,600,000 | ₩12,701,526 | ₩16,236,000 | ₩28,937,526 | ₩32,537,526 | ₩392.09 |
| 7 | 97,000 | ₩3,600,000 | ₩14,818,447 | ₩17,498,800 | ₩32,317,247 | ₩35,917,247 | ₩482.82 |
| 8 | 101,000 | ₩3,600,000 | ₩16,935,368 | ₩18,220,400 | ₩35,155,768 | ₩38,755,768 | ₩709.63 |
| 9 | 103,000 | ₩3,600,000 | ₩19,052,289 | ₩18,581,200 | ₩37,633,489 | ₩41,233,489 | ₩1,238.86 |
| Workers | Output | AFC | AVC | ATC | MC |
|---|---|---|---|---|---|
| 1 | 12,000 | ₩300.00 | ₩356.81 | ₩656.81 | ₩356.81 |
| 2 | 28,000 | ₩128.57 | ₩331.61 | ₩460.18 | ₩312.71 |
| 3 | 48,000 | ₩75.00 | ₩312.71 | ₩387.71 | ₩286.25 |
| 4 | 66,000 | ₩54.55 | ₩308.70 | ₩363.24 | ₩298.01 |
| 5 | 80,000 | ₩45.00 | ₩312.71 | ₩357.71 | ₩331.61 |
| 6 | 90,000 | ₩40.00 | ₩321.53 | ₩361.53 | ₩392.09 |
| 7 | 97,000 | ₩37.11 | ₩333.17 | ₩370.28 | ₩482.82 |
| 8 | 101,000 | ₩35.64 | ₩348.08 | ₩383.72 | ₩709.63 |
| 9 | 103,000 | ₩34.95 | ₩365.37 | ₩400.33 | ₩1,238.86 |
Worked example: seven workers
AFC, AVC, ATC, and MC Curves
AFC falls continuously as the fixed ₩3.6 million is spread over more bottles. AVC and ATC are U-shaped because of increasing then diminishing marginal returns. MC falls while MPL rises, reaches its minimum at the third worker, then rises sharply and crosses AVC and ATC near their minimum points.
Minimum Average Total Cost
Minimum ATC is the company's long-run break-even price in this discrete production model: at any price below ₩357.71, Aqua Han cannot cover all of its costs. Minimum AVC (₩308.70 at 66,000 bottles with 4 workers) is the short-run shutdown price: below it, revenue cannot even cover variable cost.
Effect of a 20% Rent Increase
- AFC shifts upward (e.g., at 97,000 bottles: ₩37.11 → ₩43.30).
- ATC shifts upward by the same amount (₩370.28 → ₩376.47 at 97,000).
- AVC remains unchanged.
- MC remains unchanged, rent is a fixed cost, so it does not change the cost of producing another bottle. The profit-maximizing quantity stays at 97,000.
Effect of a 10% Raw-Material Increase
- AVC, ATC, and MC all shift upward.
- AFC remains unchanged because fixed costs did not change.
- Because the raw-material cost rises by a constant ₩18.04 per unit, each affected per-unit curve rises by approximately ₩18.04 (e.g., MC for worker 7: ₩482.82 → ₩500.86, still below MR = ₩500).
Market Supply, Demand, and Entry Decision
- In the long run, Aqua Han should enter when the expected market price is at least minimum ATC. Entry threshold = ₩357.71 per bottle.
- At ₩500, price is above minimum ATC, so the firm can earn positive economic profit.
- Positive economic profit attracts new firms into a perfectly competitive market over time.
- Entry increases market supply (S shifts right) and places downward pressure on price until long-run economic profit approaches zero, near ₩357.71.
The market panel uses a clearly identified stylized quantity index because complete national quantity data are not available to the firm.
One-Month and Three-Month Profit
The assignment requests accounting profit but also asks for implicit costs. Because implicit costs are not part of accounting profit, both measures are presented.
| Period | Total revenue | Explicit cost | Accounting profit | Implicit cost | Economic profit |
|---|---|---|---|---|---|
| One month | ₩48,500,000.00 | ₩35,917,246.72 | ₩12,582,753.28 | ₩5,000,000.00 | ₩7,582,753.28 |
| Three months | ₩145,500,000.00 | ₩107,751,740.16 | ₩37,748,259.84 | ₩15,000,000.00 | ₩22,748,259.84 |
Profit-Maximizing Quantity
Discrete decision rule
| Worker added | Extra bottles | MC for block | MR | Decision |
|---|---|---|---|---|
| 1 | 12,000 | ₩356.81 | ₩500 | Hire, raises profit |
| 2 | 16,000 | ₩312.71 | ₩500 | Hire, raises profit |
| 3 | 20,000 | ₩286.25 | ₩500 | Hire, raises profit |
| 4 | 18,000 | ₩298.01 | ₩500 | Hire, raises profit |
| 5 | 14,000 | ₩331.61 | ₩500 | Hire, raises profit |
| 6 | 10,000 | ₩392.09 | ₩500 | Hire, raises profit |
| 7 | 7,000 | ₩482.82 | ₩500 | Hire, raises profit |
| 8 | 4,000 | ₩709.63 | ₩500 | Do not hire, lowers profit |
| 9 | 2,000 | ₩1,238.86 | ₩500 | Do not hire, lowers profit |
- The seventh worker adds 7,000 bottles at MC ≈ ₩482.82. Since ₩482.82 < MR of ₩500, hiring worker 7 increases profit.
- The eighth worker adds only 4,000 bottles at MC ≈ ₩709.63. Since ₩709.63 > ₩500, hiring worker 8 would decrease profit.
- Therefore the profit-maximizing level is 97,000 bottles with seven workers.
Profit, Loss, Break-Even, Shutdown, and Exit
| Price condition | Decision |
|---|---|
| P > ATC | Earn economic profit and produce where MR = MC |
| P = minimum ATC | Break even and earn zero economic profit |
| Minimum AVC < P < ATC | Produce in the short run while accepting an economic loss |
| P = minimum AVC | Indifferent between producing and shutting down |
| P < minimum AVC | Shut down in the short run |
| Price below ATC in the long run | Exit the market |
Risks and Controls
| # | Risk | Effect | Response |
|---|---|---|---|
| 1 | Price competition | Lowers price and marginal revenue | Secure B2B contracts and enter only above minimum ATC |
| 2 | Packaging-cost inflation | Raises AVC, ATC, and MC | Obtain multiple supplier bids and use lighter label-free packaging |
| 3 | Rent increases | Raises AFC and ATC | Negotiate a longer lease with capped increases |
| 4 | Demand below 97,000 bottles | Raises ATC through underused capacity | Obtain staged purchase commitments before hiring the seventh worker |
| 5 | Regulatory and food-safety compliance | May add fixed and variable costs | Budget for water-quality testing, factory registration, and certification |
| 6 | Simulation uncertainty | Real productivity and costs may differ | Conduct a one-month pilot and replace assumptions with observed data |
Sources and Method Notes
- AP Microeconomics Unit 3 Summative Project assignment requirements (provided by Mr. Dillhoff), including minimum wage and employer contribution rates.
- Korean bottled-water market comparison (market share): https://www.newsspace.kr/
- Gmarket, Jeju Samdasoo price reference: https://global.gmarket.co.kr/item?goodscode=1281208812
- 11st, Icis 8.0 price search: https://search.11st.co.kr/
- Coupang, Baeksansu 500 mL price search: https://www.coupang.com/np/search?q=%EB%B0%B1%EC%82%B0%EC%88%98+500ml
- Packaging Gateway, South Korea moves to label-free water packaging: https://www.packaging-gateway.com/news/south-korea-moves-to-label-free-water-packaging/
- Government24, factory registration information: https://www.gov.kr/
- Factory location and rent benchmark (Hwaseong, Gyeonggi-do)
- Competitor prices
- Market-share estimates
- Label-free packaging policy
- Aqua Han's ₩500 market price
- Raw-material cost of ₩164 before waste
- Production schedule and MPL
- Forgone founder income (₩2.5M each)
- Stylized market supply and demand quantities
Final Investment Recommendation
Invest, conditionally. At a market price of ₩500, Aqua Han maximizes profit with seven workers producing 97,000 bottles per month, earning approximately ₩12.58 million in monthly accounting profit and ₩7.58 million in economic profit. Price exceeds minimum ATC (₩357.71) by a comfortable margin, and the firm stays open in the short run at any price above ₩308.70.
Aqua Han should enter only after securing expected sales near ₩500 per bottle and demand commitments for roughly 97,000 bottles per month. Investors should expect economic profit to shrink over time as new entrants push the market price toward minimum ATC.