9781118041581

Other Production Decisions 213

Consider a variation on the oil company’s decision. Suppose two of the

company’s product managers are engaged in a heated debate. The first man-

ager oversees the company’s production and sale of gasoline; the second is

responsible for production of synthetic fiber. Both products use crude oil as an

essential input. The problem is that the current demands of the managers for

this input exceed the firm’s available crude oil supply, 20 thousand barrels.

Each manager is arguing for a greater share of the input.

How can economic analysis be used to resolve this dispute? Given a limited

resource and two products, gasoline and fiber, management’s ultimate goal

must be to allocate the crude oil to each product (in quantities MGand MF) to

maximize total profit subject to the constraint of 20 thousand total barrels.

The form of this decision is very similar to that of the multiplant decision.

Here total profit is maximized if and only if the input is allocated such that the

products generate identical marginal profits per unit of input.^11

MGMF.

FIGURE 5.4

Splitting Production

between Two Plants

To produce a given

amount of output at

least cost, the firm

divides output between

the plants in order to

equate the plants’

marginal products.

4

0 2 5 8 10 15 20

8

10

12

16

19

20

24

Marginal Product

Crude-Oil Allocations (Thousands of Barrels)

MPA = 24 – MA

MPB = 20 – 2MB

Optimal

solution

(^11) Here marginal profit is calculated per unit input because input is the appropriate decision
variable.
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