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John is thinking about setting up a doughnut van
John is thinking about setting up a doughnut van. The van itself costs $200. The ingredients for each doughnut cost $0.50.
a. What is the fixed cost of doing business in the short-run?
b. What is the variable cost per doughnut in the short-run?
c. Construct a table showing doughnut output, total cost, total fixed cost, total variable cost, average total cost, average fixed cost, average variable cost, and marginal cost for producing anything from zero up to and including ten doughnuts.
Expert Solution
a. The fixed cost of doing business in the short-run is the cost of van. This is because the business will still incur the cost of the van even without making any doughnuts. The fixed cost is $200.
b. The variable cost per doughnut in the short-run is the cost of the ingredient. The cost of the ingredients depends on the number of doughnuts made. The variable cost is $0.50 per doughnut.
c. Let us make a table to show the total cost, total fixed cost, total variable cost, average total cost, average fixed cost, average variable cost and marginal cost. The necessary formulas are as follows:
[Math Processing Error]Totalcost=Totalfixedcost+Totalvariablecost
[Math Processing Error]Totalvariablecost=Variablecostperdoughnut×Output
[Math Processing Error]Averagetotalcost=Totalcost÷Output
[Math Processing Error]Averagefixedcost=Totalfixedcost÷Output
[Math Processing Error]Averagevariablecost=Variablecostperdoughnut
[Math Processing Error]Marginalcost=Currenttotalcost−PrevioustotalcostCurrentoutput−Previousoutput
| Output | Total fixed cost | Total variable cost | Total cost | Average total cost | Average fixed cost | Average variable cost | Marginal cost |
|---|---|---|---|---|---|---|---|
| 0 | $200 | $200.00 | $0.50 | ||||
| 1 | $200 | $0.50 | $200.50 | $200.50 | $200.00 | $0.50 | $0.50 |
| 2 | $200 | $1.00 | $201.00 | $100.50 | $100.00 | $0.50 | $0.50 |
| 3 | $200 | $1.50 | $201.50 | $67.17 | $66.67 | $0.50 | $0.50 |
| 4 | $200 | $2.00 | $202.00 | $50.50 | $50.00 | $0.50 | $0.50 |
| 5 | $200 | $2.50 | $202.50 | $40.50 | $40.00 | $0.50 | $0.50 |
| 6 | $200 | $3.00 | $203.00 | $33.83 | $33.33 | $0.50 | $0.50 |
| 7 | $200 | $3.50 | $203.50 | $29.07 | $28.57 | $0.50 | $0.50 |
| 8 | $200 | $4.00 | $204.00 | $25.50 | $25.00 | $0.50 | $0.50 |
| 9 | $200 | $4.50 | $204.50 | $22,72 | $22.22 | $0.50 | $0.50 |
| 10 | $200 | $5.00 | $205.00 | $20.50 | $20.00 | $0.50 | $0.50 |
Cost:
A cost can be categorized as variable cost and fixed cost. A variable cost is where its total depends on the activity level. A fixed cost is where its total remains the same regardless of the activity level
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