to help recoup some of these costs. Does such a strategy make sense?
Explain carefully.- Comment on the following statement: “Average cost includes both fixed
and variable costs, whereas marginal cost only includes variable costs.
Therefore, marginal cost is never greater than average cost.” - A company produces two main products: electronic control devices and
specialty microchips. The average total cost of producing a microchip is
$300; the firm then sells the chips to other high-tech manufacturers for
$550. Currently, there are enough orders for microchips to keep its
factory capacity fully utilized. The company also uses its own chips in the
production of control devices. The average total cost (AC) of producing
such a device is $500 plus the cost of two microchips. (Assume all of the
$500 cost is variable and AC is constant at different output volumes.)
Each control device sells for an average price of $1,500.
a. Should the company produce control devices? Is this product
profitable?
b. Answer part (a) assuming outside orders for microchips are
insufficient to keep the firm’s production capacity fully utilized.
c. Now suppose $200 of the average cost of control devices is fixed.
Assume, as in part (a), that microchip capacity is fully utilized. Should
control devices be produced in the short run? Explain. - The last decade has witnessed an unprecedented number of mega-
mergers in the banking industry: Bank of America’s acquisitions of Fleet
Bank, MBNA, and U.S. Trust; Bank of New York’s acquisition of Mellon
Financial; and Wells Fargo’s acquisition of Wachovia, to name several of
the largest consolidations. Besides growth for its own sake, these
superbanks are able to offer one-stop shopping for financial services:
everything from savings accounts to home mortgages, investment
accounts, insurance vehicles, and financial planning.
a. In the short run, what are the potential cost advantages of these
mergers? Explain.
b. Is a $300 billion national bank likely to be more efficient than a $30
billion regional bank or a $3 billion state-based bank? What economic
evidence is needed to determine whether there are long-run
increasing returns to scale in banking?
c. Do you think these mergers are predicated on economies of scope? - An entrepreneur plans to convert a building she owns into a video-game
arcade. Her main decision is how many games to purchase for the
arcade. From survey information, she projects total revenue per year as
R 10,000Q 200Q^2 , where Q is the number of games. The cost for
each game (leasing, electricity, maintenance, and so on) is $4,000 per
year. The entrepreneur will run the arcade, but instead of paying herself
a salary, she will collect profits. She has received offers of $100,000 to sell
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