Question

(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.

Answer 1

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