Question

Think of a business with which you are somewhat familiar. For that business:

A. What are the fixed costs?

B. What are the variable costs?

C. What are the explicit costs?

D. What are the implicit costs?

The following numbers will be estimates (I'm not asking you to do any research; Begin by entering possible numbers for the fixed costs and variable costs for each level of output. Then calculate total cost, marginal cost and average cost. I just want you to have practice calculating the various costs.)

Complete this table

Quantity	Fixed cost $	Variable cost $	Total cost $	Marginal cost	Average total cost
0
1
2
3
4

E. Do your average total costs show economies of scale or diseconomies scale? Why?

Answer 1

The business is cake shop and bakery.

A. Fixed costs would be the infrastructue I would need to establish my bakery and shop. Rent for the building, oven and cake tins, nozzles and other accessories, refrigerator or cool room, cake mixing machine, weighing scale, etc., Salaries to the shop assistants, depreciation of my machinery and equipment, insurance of the building, onine and other forms of advertisement for my cakes.

B. Variable cost would be the raw materials that I need for making the cake like flour, butter, sugar, etc., extra bakers I will employ to help me with cakes in season.

C. Explicit cost would be both fixed and vriable cost I spend on my bakery.

D. Implicit cost would be the interest on my Fixed deposit that I had to withdraw to start this bakery, or my salary had I worked as a tax consultant as per my qualification.

The table of costs:

Q	TC	TFC	TVC	ATC	MC
0	20	20	0	-	-
1	32	20	12	32	12
2	42	20	22	21	10
3	47	20	27	15.67	5
4	53	20	33	13.25	6

E. My average total costs show economy of scale becasue as my output increases, my average total cost decreases.