Question

1. George sells pepperoni pizzas at $25 per pizza from a stall on the beach.   George’s pays $30 per hour to rent his stall and pays his worker $10 per hour to make and sell the pizzas. The ingredients cost $15 per pizza. These are George’s only costs.

NOTE: The hourly cost function (and table) are costs per hour. Note, however, that the total costs in any given hour depend on the number of pizzas sold that hour. The function and table should therefore only be a function of one variable, Q, the number of pizzas. But it should, of course, take into account any other hourly fixed costs.

1. (3 points) What is George’s (hourly) total cost function?

2. Fill in the following information in the table below:
   1. (3 points) Total (hourly) costs
   2. (3 points) Marginal costs
   3. (3 points) Total (hourly) revenue
   4. (3 points) Marginal revenue

Quantity	Total Costs (TC)	Marginal Costs (MC)	Total Revenue (TR)	Marginal Revenue (MR)
0
1
2
3
4
5
6
7
8

Answer 1

Quantity	Fixed Cost (FC)	Variable Cost (VC)	Total Cost (TC)	Marginal Cost   (MC)	Total Revenue (TR) @25	Marginal Revenue (MR)
0	40	0	40		0
1	40	15	55	15	25	25
2	40	30	70	15	50	25
3	40	45	85	15	75	25
4	40	60	100	15	100	25
5	40	75	115	15	125	25
6	40	90	130	15	150	25
7	40	105	145	15	175	25
8	40	120	160	15	200	25

Fixed Cost = Rent paid + Wages paid to worker = $30 + $10 = $40. Fixed Cost will remain same at all levels of output.

Variable Cost = Ingredient Cost per Pizza. Variable Cost for 2 pizzas = $15 * 2 = $30. Similarly for other levels of output has been calculated.

Part a

Hourly Total Cost Function = 40 + 15Q

Where 40 is fixed cost and 15Q is variable cost which varies with different levels of output.

Part i

Total Cost for 2 Pizzas = Fixed Cost + Variable Cost  

= 40 + 30 = $70. Similarly for other levels of output has been calculated.

Part ii

Marginal Cost = Change in Total Cost / Change in Output

Marginal Cost for 2 Pizzas = (70 - 55) / (2 - 1) = 15 / 1 = $15. Similarly for other levels of output has been calculated.

Part iii

Total (hourly) Revenue = Price * Quantity

Total Revenue for 2 Pizzas = $25 * 2 = $50. Similarly for other levels of output has been calculated.

Part iv

Marginal Revenue = Change in Total Revenue / Change in Output

Marginal Revenue for 2 Pizzas = (50 - 25) / (2 - 1) = 25 / 1 = $25. Similarly for other levels of output has been calculated.