Suppose flora bakery is the monopolist in the market for banana bread. It’s fixed cost is 3 million. While it’s labour cost and ingredients for producing each pound of banana bread are $60 and $40 respectively. Consumer are unwilling and unable to buy any banana bread when the price is $300 or above, however, the quantity demanded increases by 1000 pounds for each dollar the price drops.

Question

Suppose flora bakery is the monopolist in the market for banana bread. It’s fixed cost is 3 million. While it’s labour cost and ingredients for producing each pound of banana bread are $60 and $40 respectively. Consumer are unwilling and unable to buy any banana bread when the price is $300 or above, however, the quantity demanded increases by 1000 pounds for each dollar the price drops.

How to calculate the marginal cost, average total cost?

Answer 1

To calculate the marginal cost (MC), you need to determine the additional cost of producing one more unit of banana bread. In this case, the additional cost consists of the labor cost and ingredient cost. Since labor cost is $60 and ingredient cost is $40 per pound, the total additional cost is $100 per pound of banana bread. Therefore, the marginal cost (MC) is $100.

To calculate the average total cost (ATC), you need to consider both fixed costs and variable costs. Fixed costs are the costs that do not vary with the level of production and remain constant. In this case, the fixed cost is given as $3 million.

Variable costs include the labor and ingredient costs per pound. The labor cost is $60 and the ingredient cost is $40 per pound. Since the variable cost per pound is the sum of these two costs, it amounts to $100 per pound.

To find the average total cost (ATC), you need to sum the fixed costs and variable costs per unit of banana bread and divide by the total quantity produced. We can calculate the average variable cost (AVC) and average fixed cost (AFC) separately.

First, calculate the average variable cost (AVC) by dividing the variable cost per unit by the quantity produced. In this case, the variable cost is $100 per pound.

Next, calculate the average fixed cost (AFC) by dividing the fixed cost by the quantity produced. In this case, the fixed cost is $3 million.

Finally, calculate the average total cost (ATC) by summing the average variable cost (AVC) and average fixed cost (AFC). Therefore, ATC = AVC + AFC.

Note: To calculate the quantity produced, you need more information such as the demand function or the quantity supplied by Flora Bakery.