Answer to question 1



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Answer to question 3)


Quantity of staff

Quantity of coffees made

Fixed Cost
(Rent)

Variable Cost
(Wage)

Total Cost

Average Total Cost

Marginal Cost

0

0

$70

0

$70

NA

NA

1

30

$70

$200

$270

$9

$6.67

2

70

$70

$400

$470

$6.71

$5.00

3

130

$70

$600

$670

$5.15

$3.33

4

170

$70

$800

$870

$5.12

$5.00

5

200

$70

$1,000

$1,070

$5.35

$6.67

The law of diminishing returns states that when an optimal level of capacity is reached, adding more factor of production will result in the decrease of output.

In this circumstance, when there is only one employee, it will be hard to handle all the tasks alone. In additional, they will have to recruit more employees. As more come in, the tasks will be divided to each other.



  • Benefit of division of labour.

  • When the employees continue to do the same tasks over and over, they will get better at it.

  • Benefit of specialisation.

However, the optimal of capacity is maximised at employee No.3. If the coffee shop continues to recruit more employees, it will decrease the productivity. The reason is that the coffee shop is small with limited capital. If they continue to add more staff, they will end up get in the way of each other.

  • Decrease in output.


Answer to question 4)


  1. Graph the Marginal Cost (MC) curve and the Average Total Cost (ATC) curve on a diagram. Remember to label the curves and the axes fully.

MC

ATC

Costs





Output





  1. State clearly the relationship between Marginal Cost and Average Total Cost.

When the marginal cost is lower than the average cost, the average cost decreases; when the marginal cost is higher than the average cost, the average cost rises. And the marginal cost always cuts ATC at its lowest point.

Answer to question 5)




If Suzanne plans to make 700 pizzas per week, she should go with a smaller pizza shop, which is represented by ATC1. The average total cost of building a larger pizza house (ATC2) is greater at 700 pizzas per week than the smaller pizza house.



Because Jill is a large pizza house. It means that larger scale will come with th higher amount of fixed cost including rent, depreciation… So, it’s requires higher level of production to reach economic of scale.



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