The Great Southern Paper Company has the following marginal cost schedule for pr

Question

The Great Southern Paper Company has the following marginal cost schedule for producing pulp:

Quantity (tons)       Marginal Cost
1                              $18
2                                 20
3                                  5
4                                33
5                                43

pulp can be bought in the open market for $25 per ton. The marginal cost of converting pulp into paper is MC= 5 + 5Q, and the demand for paper is P = 135-15Q. Calculate the marginal cost of paper if the company produces its own pulp. What is the profit-maximizing quantity? Should the company purchase pulp from the outside or produce it in-house?

Explanation / Answer

1.

SO profit maximising quantity if  the company produces its own pulp is 3 units since till this unit MR is greater than MC.

THe company should produce its own pupl as in both the cases its optimal solution is 3 units, but comoany produces pupl by its own, its MC is lesser. so it will get higher profit by producing pupl by its own

Quantity (tons)        Marginal Cost producing pulp Marginal Cost producing Paper Total Marginal Cost Price MR MC if purchasing from outside 1 18 10 28 120 105 35 2 20 15 35 105 75 40 3 5 20 25 90 45 45 4 33 25 58 75 15 50 5 43 30 73 60 -15 55

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