Question

# 1. Consider the production of donuts in the short run at Krispy Kreme donuts. Assume that capital is fixed

in the short-run and that labor is variable. Also, assume that the production of donuts is such that the marginal productivity of labor increases initially, but then eventually decreases.

A) Draw Krispy Kreme’s average total cost curve, average variable cost curve, average fixed cost curve and marginal cost curve. Be sure to carefully label all four curves as well as the x-axis and y-axis.

B) On the graph you drew for Part A, label the break-even point and the shutdown point.

C) Suppose the price of donuts is above the minimum of the average total cost curve, on the diagram above, illustrate Krispy Kreme’s profit maximising level of output and their profits (or losses).

cost
Break even
point
Me
profits
AC
MR.
Are
Shutdown
point
AFC
Profit maximising
output level
XX
output
Economics