Question

Ted is the owner of a Pretzel Stall located at the mall. He produces 800 pretzels each week. He pays 5 employees $300 each and buys ingredients that cost $600. In addition, Ted also needs to pay $1,000 in rent each week for the use of the stall. Ted can reduce the number of employees and the amount of ingredients he uses on any given week but he cannot change his rental agreement because he has a contract for 2 years. If these are the only costs then his weekly average fixed cost is _____________, average variable cost is __________________ and his average total cost is ____________.

Select one:

a. $1000; $2100; $3100

b. $1.25; $2.62; $3.88

c. $1.25; $5.00; $6.25

d. $1000; $300; $1300.

Answer 1

Answer: b. $1.25; $2.62; $3.88

Since Ted can ​​​reduce the no. of employees and the amount of ingredients, these are the variable costs of his production. As the rent is fixed for 2 years and it cannot be reduced, it is the fixed cost of his production.

Average fixed cost(AFC)= (total fixed cost) / (total quantity of output produced)

Or, AFC= 1000/800= 1.25

A​​​​​verage variable cost(AVC)= (total variable cost) / (total quantity of output produced)

Or, AVC= (5*300 + 600)/800= 2100/800= 2.625

Average total cost(ATC)= (total output produced) / (total quantity of output produced)

Or, ATC= (1000+2100)/800= 3100/800= 3.875