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# Calculating costs for a bread factory

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You are the owner of a small bread factory and are thinking of lowering costs and expanding. Your small-business advisors suggested that you first review your operations and make some technological changes. Complete the following:

Explain what a technological change is and how you can use it to lower your costs.
The next thing that your small business advisors asked you to do was to break down your costs and see what you can reduce.

Develop a table that you believe shows the explicit fixed costs of the bread factory and the total amount of the costs.
Describe your variable costs.
Because you are not an expert yet on analyzing costs and optimal production levels, you decide to do a very simple analysis of your short-run fixed and variable costs if you expand. You decide that your only fixed cost will be the ovens and the variable costs will be the workers.
Quantity of Workers

Quantity of Ovens

Quantity of Loaves of Bread Produced

Cost of Ovens

Cost of Workers Per Week

0

2

0

500

0

1

2

50

450

2

2

125

3

2

210

4

2

300

5

2

410

6

2

550

7

2

625

8

2

660

9

2

700

10

2

730

Instructions

Calculate the total cost and the average total cost, and add it to the table
Calculate the marginal product of labor, and add it to the table.
Calculate the average product of labor, and add it to the table.
Although there seems to be a great demand for your bread, why would productivity decline when you hire more labor in the short run?
What are your marginal costs?
At what point do your marginal costs and your total costs intersect?
Calculate your average total costs, your average fixed costs, and your average variable costs.
What happens to your average variable costs as your output goes up? Why is that?
How would expanding the business affect the economies of scale? When would you have constant return to scale and diseconomies of scale? Provide examples.
Where is the optimal level of production and the optimal level of prices in the short run?
Please submit your assignment.

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#### Solution Preview

See the attached file for the calculations. TFC is 500 and the cost of each worker is 450 per week.

>Calculate the total cost and the average total cost, and add it to the table

TC = TFC + TVC
ATC = TC/Q

>Calculate the marginal product of labor, and add it to the table.

MPL = (change in Q)/(change in number of workers)

>Calculate the average product of labor, and add it to the table.

APL = Q/workers

>Although there seems to be a great demand for your bread, why would productivity decline when you hire more labor in the short run?

The law of diminishing ...

#### Solution Summary

This solution shows how to use Microsoft Excel to complete a table of costs for a bread factory. Formulas are given for how to calculate the following quantities:

Production
Total Fixed Cost
Total Variable Cost
Total Cost
Average Total Cost
Marginal Product of Labor
Average Product of Labor
Marginal Cost
Average Fixed Cost
Average Variable Cost

The solution also explains what information the factory needs to determine its optimal price and production quantity.

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