Question

A coffee shop's production function is given by Q = KL, where MPL = K and MPK = L. The barista wage rate is $10 and the rental per square foot is $15. In the short run, store size is fixed at 500 square feet. The short-run average total cost of serving 1,500 cups of coffee is $_____.

a. 2.34
b. 6.03
c. 5.02
d. 0.63

Answer 1

Answer:

c. 5.02

Explanation:

Q = KL

Wage rate = 10

Rental = 15

In the short run

K = 500

Such that

Output Q = 1500 = KL

1500 = 500L

L = 1500/500

L = 3

Then the total cost

= 10(3)+15(500)

= 30 + 7500

= 7530

The average total cost

= Total cost/output

= 7530/1500

= 5.02

In conclusion the short run average total cost of serving 1500 cups of coffee is 5.02. therefore option c is the answer to the question