Question

Vipsana's Gyro House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a rent of $20 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers?
A) $100
B) $124.40
C) $220
D) $240
Calculate Vipsana's total cost per day when she produces 50 gyros using two workers?
A) $100
B) $124.40
C) $220
D) $240
Calculate Vipsana's average fixed cost per day when she produces 50 gyros using two workers?
A) $2.00
B) $2.40
C) $0.40
D) $6.80
What is Vipsana's total cost per day when she does not produce any gyros and does not hire any workers?
A) $0
B) $2
C) $60
D) $20

Answer 1

Answer:

C

D

C

D

Explanation:

Fixed costs are costs that do not vary with output. e,g, rent, mortgage payments

If production is zero or if production is a million, Mortgage payments do not change - it remains the same no matter the level of output.  

Hourly wage costs and payments for production inputs are variable costs

Variable costs are costs that vary with production

If a producer decides not to produce any output, there would be no need to hire labour and thus no need to pay hourly wages.  

Variable cost per day = 2 x employees pay + (cost of ingredients x 50)

(60 x 2) + (50 x 2)

120 + 100 = 220

Total cost per day = fixed cost + variable cost per day

220 + 20 = 240

Average fixed cost per day = total fixed cost per day / 50

20 / 50 = $0.40

Vipsana's total cost per day when she does not produce any gyros and does not hire any workers is the cost of rent. Rent is a fixed cost. The firm would still have to pay rent even if its output it zero