1. Suppose that you and your roommate have started a Doughnut delivery service on
campus. List some of your fixed costs and describe why they are fixed. List some of your
variable costs and describe why they are variable.
A: Some of the fixed cost of starting a Doughnut delivery service on campus is the delivery car
and rent of headquarters, and also administrative salaries etc. These are fixed cost because the
owner has to pay the same amount of money regardless of the amount of the product he sells in
the market in a single period. Fixed cost does not vary with sales volume. Variable cost of
starting a Doughnut delivery service includes the amount of Doughnuts produced, the boxes the
Doughnuts go in, delivery boy wages, marketing expenses etc. These are variable cost because
they depend directly on the quantity of the product produced. As sales go up, so do variable cost
and vice versa.
2. Zee & Inc. makes Greeting Cards and then sells them door-to-door. Here is the
relationship between the number of workers and Zee’s output in a given day:
WORKERS OUTPUT MARGINAL
PRODUCT
TOTAL
COST
AVERAGE
TOTAL
COST
MARGINAL
COST
0 0 ---- $200 ---- ----
1 20 20 300 $15.00 $5.00
2 50 30 400 8.00 3.33
3 90 40 500 5.56 2.50
4 120 30 600 5.00 3.33
5 140 20 700 5.00 5.00
6 150 10 800 5.33 10.00
7 155 5 900 5.81 20.00
