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Pastry Paradise is looking to expand. It decides to take over Sweet Tooth, a competitive firm. The two firms have similar technology but different costs. Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced. Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced. ​ If the company plans to produce 5000 units of output, is using the competitor’s technology a good idea? a. ​Yes b. ​No c. ​It does not matter, at 5000 units you are indifferent between the two technologies d. ​None of the above

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Answer:

The correct answer is B.

Explanation:

Giving the following information:

Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced. Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced.

First, we need to determine the total cost formula:

Total cost= total fixed costs + total variable cost

Pastry:

TC= 1,500 + 1*x

x= number of units

Sweet:

TC= 500 + 5x

x= 5,000 units

Now, we can calculate the cost difference:

Pastry= 1,500 + 1*5,000= $6,500

Sweet= 500 + 5*5,000= $25,500

It is not a good idea, because of the unitary variable cost. In Sweet company, the cost is significantly higher.

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