b. Now suppose the firm has the chance to buy an unlimited number of
engines from another company at a price of $1,400 per engine. Will
this option affect the number of cyclesit plans to produce? Its price?
Will the firm continue to produce engines itself? If so, how many?- A firm’s long-run total cost function is
a. What is the shape of the long-run average cost curve?
b. Find the output that minimizes average cost.
c. The firm faces the fixed market price of $140 per unit. At this price,
can the firm survive in the long run? Explain.- A firm uses a single plant with costs C 160 16Q .1Q^2 and faces the
price equation P 96 .4Q.
a. Find the firm’s profit-maximizing price and quantity. What is its profit?
b. The firm’s production manager claims that the firm’s average cost of
production is minimized at an output of 40 units. Furthermore, she
claims that 40 units is the firm’s profit-maximizing level of output.
Explain whether these claims are correct.
c. Could the firm increase its profit by using a second plant (with costs
identical to the first) to produce the output in part (a)? Explain. - As noted in Problem 5 of Chapter 3, General Motors (GM) produces
light trucks in its Michigan factories. Currently, its Michigan production
is 50,000 trucks per month, and its marginal cost is $20,000 per truck.
With regional demand given by: P 30,000 0.1Q, GM sets a price of
$25,000 per truck.
a. Confirm that setting Q 50,000 and P $25,000 is profit maximizing.
b. General Motors produces the engines that power its light trucks and
finds that it has some unused production capacity, enough capacity to
build an additional 10,000 engines per year. A manufacturer of sports
utility vehicles (SUVs) has offered to purchase as many as 25,000
engines from GM at a price of $10,000 per engine. GM’s contribution is
estimated to be about $2,000 per engine sold (based on a marginal cost
of $8,000 per engine). Should GM devote some of its engine capacity to
produce engines to sell to the SUV manufacturer? Does this outside
opportunity change GM’s optimal output of light vehicles in part (a)?
c. GM also assembles light trucks in a West Coast facility, which is
currently manufacturing 40,000 units per month. Because it produces
multiple vehicle types at this mega-plant, the firm’s standard practice
is to allocate $160 million of factorywide fixed costs to light trucks.
Based on this allocation, the California production manager reports
that the average total cost per light truck is $22,000 per unit. Given
this report, what conclusion (if any) can you draw concerning the
C 360 40Q10Q^2.
266 Chapter 6 Cost Analysisc06CostAnalysis.qxd 9/29/11 1:46 PM Page 266