Question

Pastry Paradise is looking to expand. It decides to take over Sweet Tooth, a competitive firm. The two firms have similar technology but different costs. Pastry Paradise has $1800 fixed costs and $2 marginal cost per unit produced. Sweet Tooth has $600 fixed costs but $3 marginal cost per unit produced.
d. at what level of output will pastry paradise be indifferent between the two technologies.
e. if pastry paradise has no intention of producing more than 400 units. it does not have to worry about sweet tooth. true or false? explain
f. if pastry paradise has no intention of producing more than 500 units. it does not have to worry about sweet tooth. true or false? explain

Answer 1

(d) The total cost of production in Pastry Paradise = 1800 + 2Q

The total cost of production in Sweet tooth = 600+ 3Q

PP is indifferent when the costs are equal

=> 1800 + 2Q = 600+ 3Q

=> Q = 1200

(e) and (f)

Pastry Paradise does not have to worry about Sweet tooth when,

total cost of production in Pastry Paradise < total cost of production in Sweet tooth

=> 1800 + 2Q <  600+ 3Q

=> Q > 1200

Thus, if there is no intention to produce more than 400 or 500 goods, the statements are false. PP willhave to worry about Sweet tooth as that is the technology that will be cheaper for him.