Question

A recent food craze in Brisbane has seen an increase in the popularity of doughnuts. The market for doughnuts is perfectly competitive. Gerald decides to open a single doughnut shop called Doughnut Love. He will incur fixed costs for store rent, and variable costs include operating the machinery, ingredients and wages for employees. Assume that Gerald's marginal costs increase with the total quantity of doughnuts produced and are initially less than his average variable costs.

As the quantity of doughnuts Gerald produces in his store increases, which of the following statements are true:

  

Gerald's average fixed costs will continually decrease as more doughnuts are produced.

  

Gerald's average variable costs will continually increase as more doughnuts are produced.

  

Gerald's average variable costs will initially decrease at low levels of doughnut production, then begin to increase with increased doughnut production.

  

Gerald's average total cost will be the same as his marginal cost at all levels of doughnut production.

Answer 1

Correct statement-

Gerald's average fixed costs will continually decrease as more doughnuts are produced.

And

Gerald's average variable costs will initially decrease at low levels of doughnut production, then begin to increase with increased doughnut production.