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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.
-What is the total cost,at the level of production where Pastry Paradise is indifferent between which technology is used?
A)$1750
B)$1000
C)$1500
D)$2000

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.
-​What is the total cost,at the level of production where Pastry Paradise is indifferent between which technology is used?
A)​$1750
B)$1000
C)$1500
D)​$2000

Quizplus · Accepted Answer

At the level of production where Pastry Paradise is indifferent between which technology is used, the total costs of using either technology would be the same. Let's denote the level of production as Q. For Pastry Paradise, the total cost is $1500 (fixed) + $1*Q (variable). For Sweet Tooth, the total cost is $500 (fixed) + $5*Q (variable). Setting these equal to find the indifference point: $1500 + $1*Q = $500 + $5*Q. Solving for Q gives Q = 250 units. Substituting Q back into either total cost equation, for Pastry Paradise: $1500 + $1*250 = $1750.

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