Someone is telling you about the gym that they run. It is a family business. Both parents in the family work in the business full time and pay themselves competitive market salaries. The business makes a profit of $50,000 per year based on audited accounts. However, the family have their two teenage children work in the business at evenings and weekends for no wages. Is the gym making an economic profit of $50,000 per year? Explain. (4 marks) Your friend runs a donut stall at a market. Together you have estimated the short-run cost function of the donut stall to be TC = 100,000 + 0.05q, where TC is the annual total cost in dollars and q is the annual total quantity of donuts.

(b) What is the total fixed cost for the donut stall? (1 mark)

(c) The donut stall has a great year, selling 1000 donuts per day and operating for a total of 300 days (6 days a week for 50 weeks). How any donuts have they sold and what is the average variable cost? (3 marks)

(d) What is the marginal cost of producing a donut at this level of output? (1 mark)

(e) Given the donut output in part (c), what is the average fixed cost of donuts? (2 marks)

(f) Suppose your friend wants to expand their business by running a second stall which will cost $50,000, increasing total fixed costs by this amount. Expanding the business means they will have access to volume discounts on the inputs used to make donuts, reducing the average variable costs per donut to $0.03. Provide the new total cost equation for the expanded business. (3 marks)