she produces these in her own home without any help, unless she has a large number of orders on a...
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She produces these in her own home without any help, unless she has a large number of orders on a
particular day.
Marcia Deal bakes and decorates large, elaborate,
multi-layered, special occasion cakes.
What does Marcia need to operate her business?
# TC TFC TVC ATC MC
0
1
2
3
4
5
6
7
8
With the following information, complete the table:
The total cost of producing 5 cakes is $135Marcia’s total fixed cost for 1 cake is $25
The total cost of 2 cakes is $60
The total variable cost for 1 cake is $25
The total variable cost of producing 7 cakes is $220The marginal cost of the 6th cake is $45
The marginal cost for the 8th cake is $91The ATC per cake when 3 cakes or when 4 cakes are made is $25
Why is the Marginal Cost of the 7th and 8th cakes fairly high?
If Marcia can sell from 0 - 8 cakes at $40 each, how many will she choose to
produce and sell per day if she is trying to maximize her profits??
On the graph, plot the average total cost and marginal cost of producing
from 0 – 8 cakes.Plot the marginal cost at the
midpoints
$120
110
100
90
80
70
60
50
40
30
20
10
01 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
Graph Marcia’s ATC, MC and MR
$120
110
100
90
80
70
60
50
40
30
20
10
01 2 3 4 5 6 7 8 Number of
Cakes
Avera
ge T
ota
l C
ost
and M
arg
inal C
ost
Graph Marcia’s ATC, MC and MR
#Total
Revenue
Total Cost
Total Profit
Marginal Revenue
Marginal Cost
0
1
2
3
4
5
6
7
8
Why does total cost exhibit this pattern in this exercise?
On the graph, plot the total cost of producing from 0 – 8 cakes.
$350
300
250
200
150
100
50
01 2 3 4 5 6 7 8 Number of
Cakes
Tota
l C
ost
Graph Marcia’s TC, TFC and TVC
$350
300
250
200
150
100
50
01 2 3 4 5 6 7 8 Number of
Cakes
Tota
l C
ost
Graph Marcia’s TC, TFC, TVC and TR
Total Fixed Costs
Do change with output
Do not change with output
Total Variable Costs
Total Costs = TFC + TVC
The least cost combination of inputs.
Efficient Production
The recipe: going from inputs to outputs
It varies by firmTechnological changes affect the Production
functionCreative Destruction
All variables can change
Long Run
Factors like labor and raw materials can be changed
Short Run:
Amount of Labor Amount of Output
Data:
0 01 32 83 124 155 176 18
Output
Quantity of Labor
18
15
12
9
6
3
1 2 3 4 5 60
Graphing:
Now she is considering giving up the business to begin a daycare
center in her home.
Marcia Deal used to bake and decorate large, elaborate,
multi-layered, special occasion cakes.
With the Total Cost info,
complete the table
Children Total Cost
TFC TVC ATC MC
0 $15
1 $40
2 $44
3 $48
4 $68
5 $90
Graph Marcia’s TC, TFC and TVC
$100
$80
$60
$40
$20
01 2 3 4 5 6
Graph Marcia’s ATC, and Marginal Costs
$50
$40
$30
$20
$10
01 2 3 4 5 6
Marginal Cost
Average Fixed CostsAverage Variable Costs
Average Total Costs = ?+?Change in cost with 1 more
output
Output TFC TVC TC0 100 0 1 50
2 90
3 120
4 160
5 220
6 300
7 400
8 5209 670
10 900
______
___
___
___
___
____________
100
100
100
100
100
100
100
100
100
100
100
150
190
220
260
320
400
500
620
770
1000
______
___
___
___
___
____________
Output AFC AVC ATCMC0 (TFC/output) (TVC/output) (TC/output) (TC1-TC0)
1 ________ ________ ________ _____
2 ____________ ____________ ____________ _______
3 ____________ ____________ ____________ _______
4 ____________ ____________ ____________ _______
5 ____________ ____________ ____________ _______
6 ____________ ____________ ____________ _______
7 ____________ ____________ ____________ _______
8 ____________ ____________ ____________ _______
9 ____________ ____________ ____________ _______
10 ____________ ____________ ____________ _______
1
2
3
4
5
6
7
8
9
10
100
50
33
25
20
18
14
12
11
10
50
45
40
40
44
50
59
65
74
90
150
95
71
65
64
67
71
78
85
100
50
40
30
40
60
80
100
120
150
230
Cost
Output
600
500
400
300
200
100
1 2 3 4 5 60 7 8 9 10
Total Variable Cost
Total Fixed Cost
Total Cost
700
800
900
Cost
Output
60
50
40
30
20
10
1 2 3 4 5 60
Graphed
7 8 9 10
70
80
90
and
Cost
Output
600
500
400
300
200
100
1 2 3 4 5 60
Graphing:
7 8 9 10
700
800
900
Cost
Output
60
50
40
30
20
10
1 2 3 4 5 60
Graphing:
7 8 9 10
70
80
90
Like Labor
In the beginning, output increases with each unit added, but at some point output will begin to decrease
with each additional unit of a resource.
ATC curve goes down as efficiency increases
Then begins to go up
The Law of Diminishing Returns
LRAC
Houses Built
600,000
500,000400,000
300,000
200,000
100,000
1 2 3 4 5 60 7 8 9 10
Constant Returns to
Scale
Diseconomies of Scale
Economies of Scale
Gets less efficient as size
increases
Gets more efficient as size increases
Efficient Range of Production
Economies of Scale
Less efficient as size increases
More efficient as size increasesDiseconomies of Scale
Constant Returns to ScaleEfficient Range of Production
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