Question

Al's Donuts produces about 600 dozen doughnuts daily. If flour prices increase 20 percent

a. marginal cost, average total cost, the average variable cost, and average fixed cost will shift up.
b. only marginal cost and the average total cost will shift up.
c. only marginal costs will shift up.
d. marginal cost, the average variable cost, and the average total cost will shift up.

Answer 1

(D) marginal cost, the average variable cost, and the average total cost will shift up.

Step-by-step explanation:

Given the nature of business of AI's Donuts, flour prices is part of the variable cost of the business as it will change will any change in the output of the firm.

An increase in flour prices, a variable cost, will have the following effect on the following costs.

• Average variable cost will increase since flour is a variable cost.

• Average total cost will increase since average total cost = average variable cost + average fixed cost.

• Marginal cost will increase since marginal cost = (change in total cost)/(change in quantity). Marginal cost will thus increase since total cost will increase.

• Average fixed cost will however remain unchanged since only variable cost will increase.

Therefore, option (D) is correct as marginal cost, the average variable cost, and the average total cost will shift up.