ou plan to set up a doughnut van. The van itself costs $1000. The business permit (paid just once at the start) costs $500. The ingredients for each doughnut cost $1, the hourly wage of your helper is $10 and you together produce 100 doughnuts per hour.

a. What is your fixed cost of doing business?

What is your accounting (i.e. explicit) variable cost per doughnut? Explain your answers (hint: the wage of the helper has to be converted into perdoughnut terms, using that fact that for $10 s/he can produce 100 doughnut per hour).

b. Construct a table showing your total cost, average total cost and marginal cost for output levels varying from 0 to 2 doughnuts.

c. Roughly draw the total cost, the marginal cost and the average total cost curves (only roughly sketch them to show their shapes, do not try to do them exactly as per your table). Explain their shape and slopes (hint: some may differ from the usual).

d. Mention other explicit as well as implicit costs that may be involved in this type of business. Explain why above some quantity your average variable cost curve is likely to start sloping upward

. e. (this part is a bit challenging and we will not penalize you if you do not get it right, we just want you to think about it and write down your thoughts). Discuss what is the optimal short-run quantity of doughnuts you should produce an hour

. Assume that no other helper can fit in the van and 200 people per hour are willing to buy the doughnuts for the price you charge.

Explain what is generally the optimal quantity a firm should produce, and how it differs in the short term and long.