Use the following setup for the next question.
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 Pastry Paradise takes over Sweet Tooth,at what level of production would it be indifferent between which technology is used.
A)500
B)750
C)250
D)125

Question

​Use the following setup for the next question.
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 Pastry Paradise takes over Sweet Tooth,at what level of production would it be indifferent between which technology is used.
A)​500
B)750
C)250
D)​125

Quizplus · Accepted Answer

To find the level of production at which Pastry Paradise would be indifferent between the two technologies, we need to find the point where the total costs of producing with either technology are equal.

Let P be the level of production. Then, the total cost for Pastry Paradise would be:

TC1 = $1500 + $1P

The total cost for Sweet Tooth would be:

TC2 = $500 + $5P

Setting TC1 = TC2 and solving for P:

$1500 + $1P = $500 + $5P

$1000 = $4P

P = 250

Therefore, at a level of production of 250 units, Pastry Paradise would be indifferent between the two technologies. At this point, the total cost of producing with either technology would be $2000 ($1500 fixed cost + $500 total variable cost), resulting in the same profit regardless of which technology is used.

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Use the Following Setup for the Next Question