Questions of the Day
Output and Price Choices

1a. A supplier of costume jewelry last year sold 10 million units of output at a price of $6 per unit. As a result of wage increases granted to its workers and increases in the price of materials, it now finds that the cost per unit at its current level of production is $8. The cost accountant furthermore assures the managers that costs will change by $2,000,000 for every change in production of one million units - if output increases by 1 million units, costs will increase by $2 million. Unfortunately, the market conditions are such that the firm cannot raise the price of its product. Given this situation, should the management accept an offer by a foreign buyer to purchase an additional 10 million units at a price of $5 per unit? You are to provide advice to this firm on the advisability of taking this new "money losing" proposition. Your position should be presented in a brief memo.

1b.  Recently I overheard a conversation regarding a wedding - or in this case an almost wedding.  It seems that the bride-to-be wanted to call off the wedding for personal reasons.  The reaction that she got from her mother was - you already paid $10,000 for the wedding.  Please design a response that this bride-to-be could give her mother.

1c.  The government of China has been involved for years in construction of a massive Three Gorges Dam on the Yangtze River and this has raised the question of the economic viability of dam projects.  How would you handle the "economics" of this problem.  The national government of a neighboring country is reassessing its decision to build a dam.  The dam was built for one purpose - to produce cheap electricity.  At this time the government has spent $45 million on the dam and the engineers have told them that they can expect to complete the construction and run the dam over its useful life for $10 million.  The accountants, meanwhile, have indicated that the electricity generated by the dam over its useful life can be sold for $8 million.  What's your advice - should the government complete the nearly completed dam? 

2. Let's look back at the situation at Terrible T's. Describe what impact the following changes would have on the total, variable, fixed, and marginal cost of the operation. What impact would these have on the optimal level of sales for the shop?

• a. an increase in the cost of the T's
• b. an increase in the cost of rent
• c. an increase in the price paid for help in the store
• d. an increase in the fee charged by the store's accountant

3. Let's return to our local retailer who is experiencing theft problems at its new super store and who has decided to hire security guards. The table below contains the data that you calculated in the last QOTD.  What is new is the final column which provides you with data on the price that you could sell the 'saved' items at.  For example, if 30 items were saved, the 30 items could be sold at a price of $23.  If 36 items were saved, the price that they could be sold at would drop to $22.

a. With these data you are to fill in the information in the remaining columns.  This would include total revenue (TR), marginal revenue (MR), and profit. What is the profit maximizing level of savings? 

b. Construct a graph of profit and a graph of marginal cost and marginal revenue.

c. Redo part a when FC rises to $250.