6) Refer to figure 2. Suppose Angie McMuffin has to choose between building a sm

Question

6) Refer to figure 2. Suppose Angie McMuffin has to choose between building a smaller bakery and a larger bakery. In the following graph, the relationship between costs and output for the smaller bakery is represented by the curve ATC1, and the relationship be- tween costs and output for the larger bakery is represented by the curve ATC2. Average Cost ATC ATC2 3,500 4,000 4,700 6,500 Quantity Figure 2. a. If Angie expects to produce 3,600 muffins per month, should she build a smaller bakery or a larger bakery? Explain. Answer: (6 points) Smaller Larger (circle the correct answer) Explain using the concept of ATC (6 points) b. If Angie expects to produce 5,000 muffins per month, should she build a smaller bakery or a larger bakery? Explain. Answer Smaller Larger (circle the correct answer Explain using the concept of ATC (6 points) (6 points)

Explanation / Answer

Ans)

a)
Smaller
This is because producing an output of 3600 is not possible on the larger curve(since it has no point of 3600 on it).
b)
Larger
This is because producing an output level of 5000 will cost less on the larger ATC curve than the smaller ATC curve.As a result the firm will be able to minimize costs.

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