Question

# (a) Siti bakes cakes for special occasions. She produces cake in her own home without any...

(a) Siti bakes cakes for special occasions. She produces cake in her own home
without any help, unless she has a large number of orders on a particular day.
Given the following information, construct a table indicates Total Cost (TC),
Total Fixed Costs (TFC), Total Variable Cost (TVC), Average Total Cost
(ATC) and Marginal Cost (MC) for producing from 0 through 8 cakes per
day. If Siti can sell from 0 through 8 cakes at RM35 each, how many will she
choose to produce and sell per day if she is trying to maximize profit? How
much profit/loss does she earn at the profit maximizing level of output?

 The total cost of producing 5 cakes is RM135
 Total fixed cost for 1 cake is RM25
 The marginal cost of the 8th cake RM91
 The average total cost per cake when 3 cakes or 4 cakes are made is
RM25.
 The total variable cost of producing 7 cakes is RM220
 The marginal cost of the 6th cake is RM45
 The total cost of 2 cakes is RM60
 The total variable cost of 1 cake is RM25.

Working notes:

• TC = TFC + TVC = 25 + TVC, since TFC is constant at all output, thus,
• TVC = TC - TFC
• ATC = TC / Q, thus
• TC = ATC x Q
• MC = Change in TC / Change in Q

So:

 Q TFC TVC TC ATC MC 0 25 0 25 1 25 25 50 50 25 2 25 35 60 30 10 3 25 75 100 25 40 4 25 100 125 25 25 5 25 110 135 27 10 6 25 155 180 30 45 7 25 220 245 35 65 8 25 311 336 42 91

Profit is maximized when P >= MC and MC is increasing.

(i) When P = 35:

When Q = 5, P > MC (35 > 10) but when Q = 6, P < MC (35 < 45). So

Q = 5

(ii) When Q = 5,

Total revenue (TR) = P x Q = 35 x 5 = 175

Profit = TR - TC = 175 - 135 = 40

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