Question

The following tables show a small firm’s long-run average cost of manufacturing a good at two different plants:

Plant1:

Quantity: 1 2 3 4 5 6 7 8 9

T.C.= 50 106 164 224 287 355 430 520 618

A.C.= ? ? ? ? ? ? ? ? ?

M.C.= ? ? ? ? ? ? ? ? ?

Plant2:

Quantity: 1 2 3 4 5 6 7 8 9

T.C= 20 52 90 130 175 227 285 345 407

A.C = ? ? ? ? ? ? ? ? ?

M.C= ? ? ? ? ? ? ? ? ?

T.C=Total Cost

A.C=Average Cost

M.C=Marginal Cost

c) A new manager is assigned to the production department. He thinks that the firm can profitably move all production to Plant 2 since the average cost of production is lower in Plant 2 than in Plant 1. If the firm only uses Plant 2, how much should it produce in order to maximize profits? Find the firm’s profit. Assume zero fixed cost.

Answer 1

c)

Plant2:

Q: 1 2 3 4 5 6 7 8 9

TC: 20 52 90 130 175 227 285 345 407

AC: 20 26 30 32.5 35 37.8 40.7 43.1 45.2

MC: -- 32 38 40 45 52 58 60 62

In order to maximize profits it should produce at P = MC = AC in the long run.

So, between 1 and 2 units of output should be produced.