Doug wants to go into the donut business. For $500 per month he can rent a baker

Question

Doug wants to go into the donut business. For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts . He must pay unionized donut bakers a monthly salary of $400 each. he projects his production function to be  Q=5KL, where Q is tonnes of donuts.

a) what are Doug's monthly total cost function, variable cost function and marginal cost?

b) How many bakers will Doug hire to make 25 tonnes of donuts?

c) Give Doug's total cost function if his production function turns out to be Q=2KL. 

Explanation / Answer

a. What is Doug's monthly total cost function, variable cost function, and marginal cost? K=1 L=Q/5 TC = 500 + 400(Q/5) = 500 + 80Q VC = 80Q The marginal cost is equal to the slope of the total cost curve which is MC = 80. b. How many bakers will Doug hire to make 25 tons of donuts? L = Q/5 = 25/5 = 5 c. What will happen to Doug's total cost if his production function turns out to be Q=2KL? K = 1, L = Q/2, TC = 500 + (400/2)Q = 500 + 200Q

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