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

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(a) Fill in the following table, where TFC = Total Fixed Cost,
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TFC
TC
MC
0
0
1
5
1.6
10
2
15
2.35
20
2.75
25
3.22
30
3.75
35
4.35
40
5
45
5.75
50
6.6
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MC
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0
0
$0
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1
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20
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20
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28
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28
24
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32
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8
20
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20
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28
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28
24
36
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32
32
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34
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215
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300
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