Find Q*. Explain why total output is greater than in part (b).
d. In the long run, the firm can produce using as many or as few plants as
it wishes (each with the preceding cost function). In this case, what kind
of returns to scale hold? What are the firm’s optimal output and price
in the long run? How many plants will the firm use to produce the
good? Hint:Refer to the value of minimum AC you found in part (a).- A firm produces digital watches on a single production line serviced
during one daily shift. The total output of watches depends directly on the
number of labor-hours employed on the line. Maximum capacity of the
line is 120,000 watches per month; this output requires 60,000 hours of
labor per month. Total fixed costs come to $600,000 per month, the wage
rate averages $8 per hour, and other variable costs (e.g., materials) average
$6 per watch. The marketing department’s estimate of demand is P
28 Q/20,000, where P denotes price in dollars and Q is monthly demand.
a. How many additional watches can be produced by an extra hour of
labor? What is the marginal cost of an additional watch? As a profit
maximizer, what price and output should the firm set? Is production
capacity fully utilized? What contribution does this product line provide?
b. The firm can increase capacity up to 100 percent by scheduling a
night shift. The wage rate at night averages $12 per hour. Answer the
questions in part (a) in light of this additional option.
c. Suppose that demand for the firm’s watches falls permanently to P
20 Q/20,000. In view of this fall in demand, what output should the
firm produce in the short run? In the long run? Explain.
Discussion QuestionExplain why the cost structure associated with many kinds
of information goods and services might imply a market supplied by a small
number of large firms. (At the same time, some Internet businesses such as
grocery home deliveries have continually suffered steep losses regardless of
scale. Explain why.) Could lower transaction costs in e-commerce ever make it
easier for small suppliers to compete? As noted in Chapter 3, network exter-
nalities are often an important aspect of demand for information goods and
services. (The benefits to customers of using software, participating in elec-
tronic markets, or using instant messaging increase with the number of other
users.) How might network externalities affect firm operating strategies (pric-
ing, output, and advertising) and firm size?Spreadsheet Problems
S1. A firm’s production function is given by the equationQ12L.5K.5,
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