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?

#TCTFC TVCATC MC With the following information, complete the table: The total cost of producing 5 cakes is $135 Marcia’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 $220 The marginal cost of the 6 th cake is $45 The marginal cost for the 8 th cake is $91 The ATC per cake when 3 cakes or when 4 cakes are made is $25 Why is the Marginal Cost of the 7 th and 8 th cakes fairly high?

If Marcia can sell from 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

$ Number of Cakes A v e r a g e T o t a l C o s t a n d M a r g i n a l C o s t Graph Marcia’s ATC, MC and MR

$ Number of Cakes A v e r a g e T o t a l C o s t a n d M a r g i n a l C o s t

# Total Revenue Total Cost Total Profit Marginal Revenue Marginal Cost

Why does total cost exhibit this pattern in this exercise? On the graph, plot the total cost of producing from 0 – 8 cakes.

$ Number of Cakes T o t a l C o s t Graph Marcia’s TC, TFC and TVC

$ Number of Cakes T o t a l C o s t 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 firm Technological changes affect the Production function Creative 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:

Output Quantity of Labor 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 ChildrenTotal Cost TFCTVCATCMC 0$15 1$40 2$44 3$48 4$68 5$90

Graph Marcia’s TC, TFC and TVC $100 $80 $60 $40 $

Graph Marcia’s ATC, and Marginal Costs $50 $40 $30 $20 $

Marginal Cost Average Fixed Costs Average Variable Costs Average Total Costs = ?+? Change in cost with 1 more output

Output TFC TVC TC ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Output AFC AVC ATCMC 0 (TFC/output) (TVC/output) (TC/output) (TC1-TC0 ) 1________ _____ 2 ____________ _______ 3 ____________ _______ 4 ____________ _______ 5 ____________ _______ 6 ____________ _______ 7 ____________ _______ 8 ____________ _______ 9 ____________ _______ 10 ____________ _______

Cost Output Total Variable Cost Total Fixed Cost Total Cost

Cost Output Graphed and

Cost Output Graphing:

Cost Output Graphing:

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, , , , , , 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 increases Diseconomies of Scale Constant Returns to Scale Efficient Range of Production