Check Your Understanding

1. Question

   Alicia’s Apple Pies is a roadside business. Alicia must pay $9.00 in rent each day. In addition, it costs her $1.00 to produce the first pie of the day. In addition, it costs her $1.00 to produce the first pie of the day. The additional cost of each subsequent pie is 50% more than the one before. For example, the second pie costs $1.00 × 1.5 = $1.50 to produce, and so on.

   1. Calculate Alicia’s marginal cost, variable cost, average fixed cost, average variable cost, and average total cost as her daily pie output rises from 0 to 6. (Hint: The variable cost of two pies is just the marginal cost of the first pie, plus the marginal cost of the second, and so on.)

   2. Indicate the range of pies for which the spreading effect dominates and the range for which the diminishing returns effect dominates.

   3. What is Alicia’s minimum-cost output? Explain why making one more pie lowers Alicia’s average total cost when output is lower than the minimum-cost output. Similarly, explain why making one more pie raises Alicia’s average total cost when output is greater than the minimum-cost output.