Question

A bakery uses one equipment (oven), various materials (flour, oil and sugar etc.) plus bakers (labor force). Suppose the cost of the baking oven is $100 per day. In this December, there are four bakers were employed by this firms at the cost of $100 per baker per day. Total output is chocolate croissants. The material cost is $ 0.50 per piece (flour, oil and sugar etc.). Suppose the total output of this bakery is 1,000 croissants per day. Now try to figure out the average fixed cost (AFC) and average total cost (ATC) per croissant in this December ____.

A. AFC = $0.10 and ATC = $0.50

B. AFC = $0.60 and ATC = $0.50

C. AFC = $0.10 and ATC = $1.00

D. AFC = $0.60 and ATC = $1.00

Answer 1

The correct answer is (C) AFC = $0.10 and ATC = $1.00

Fixed Cost is the Cost that firm incurs irrespective of whatever output he produces and Hence it does not depends on Output. Hence in this Case Fixed Cost =  Cost of Baking Oven = 100

so AFC = Fixed Cost/Output = 100/1000 = 0.10

Hence AFC= $0.10

ATC = Total Cost/Output

Here Output = 1000

Lets Calculate Total COst

Total Cost = Cost of Baking Oven + Cost of 4 employees + Total Material Cost

= 100 + 4*100 + 0.5*Output and Here Output = 1000

=> Total Cost = 100 + 400 + 0.5*1000

= $1000

Hence ATC = Total Cost/Output = 1000/1000 = $1.00

Hence, the correct answer is (C) AFC = $0.10 and ATC = $1.00