You are the owner of a small bread factory and are thinking of lowering costs and expanding. Your small-business advisors suggested that you first review your operations and make some technological changes. Complete the following:

•Explain what a technological change is and how you can use it to lower your costs.

•Assume that you thought of something innovative to change your process. Would it help you in the short run? How?

The next thing that your small business advisors asked you to do was to break down your costs and see what you can reduce.

•Develop a table that you believe shows the explicit fixed costs of the bread factory and the total amount of the costs.

•Describe your variable costs.

•Because you are not an expert yet on analyzing costs and optimal production levels, you decide to do a very simple analysis of your short-run fixed and variable costs if you expand. You decide that your only fixed cost will be the ovens and the variable costs will be the workers.

Instructions

1.Graph the total cost and the average total cost.

2.Calculate the marginal product of labor, and add it to the table.

3.Calculate the average product of labor, and add it to the table.

4.What is the significance if one is greater than the other?

5.Although there seems to be a great demand for your bread, why would productivity decline when you hire more labor in the short run? How would that reflect on your production graph?

6.What are your marginal costs?

7.At what point do your marginal costs and your total costs intersect?

8.What happens to the total costs after this point?

9.Calculate your average total costs, your average fixed costs, and your average variable costs.

10.Is your marginal cost greater than or less than your average variable cost or your average total cost? What does that mean? Where do you want your marginal costs to be?

11.What happens to your average variable costs as your output goes up? Why is that?

12.Explain why in the bread-making business that, in the long run, all costs are variable and the average total costs equals the average variable costs. How would expanding the business affect the economies of scale? When would you have constant return to scale and diseconomies of scale? Provide examples.

13.Where is the optimal level of production and the optimal level of prices in the short run? Is there enough information to make a decision for the long run? What information do you need?

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