Suppose you run a bakery, briefly summarize what your major fixed costs, marginal costs, and implicit...

Suppose you run a bakery, briefly summarize what your major fixed costs, marginal costs, and implicit costs would be given by.

Suppose the marginal costs associated with a loaf of bread equal $0.50. You're considering whether to charge a price of $2.00 or $3.00 for each loaf. What are the major factors that you should consider in making this decision?

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Expert Solution

The fixed cost of bakery will involve buying the relevant machines and furniture. This cost will remain constant irrespective of the output level.

The marginal costs refers to an increase in the total cost/total variable cost when output changes by 1 unit. Total variable costs are the costs involved in hiring fixed factors of production. For e.g. the cost of hiring workers (wages) is classified under total variable cost.

It is given to us that the marginal cost is $0.50. To decide on the price level, one of the important factors we need to consider the market structure of this firm. If this is a perfectly competitive firm then it will charge a price equal to marginal cost. That is, it will charge a price of $0.50. However, if it’s a monopoly firm (single seller), then it has a considerable market power. In such a case, it can charge a price greater than $0.50. The firm can also price-discriminate in such a market and charge different prices to different customer groups.

Rahul Sunny answered 1 year ago

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