QUESTION 1 NAPA Corporation\'s marginal cost is expressed by MC 4 +3Q, where MC

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QUESTION 1 NAPA Corporation's marginal cost is expressed by MC 4 +3Q, where MC is marginal cost and Q is the number of products produced products is $3 If you are the consultant for the company, would you advise the firm to produce or shut down? Briefly explain your decision. The price of a unit of its T TT Paragraph Arial 3(12pt) ' :=,E-TI ' +Mashups T “ @C HTHL CSS Words:0 Path p QUESTION 2 Dashen Company is a monopoly that produces at two plants. The demand for its product is given by P 20-Q The marginal cost of plant 1 is MC1 2 marginal cost of plant 2 is MC2 202 a How much output does the firm produce at each plant? b What price should it charge for its product? 3 (12pt) '·· T. /.. T TIT Paragraph , Arial Close Save All Answers Click Save and Submit to save and submit. Click Save Al Answers to sove all ons herever my name is mentioned, the result v

Explanation / Answer

Question 1

The decision of shutting down operations depend upon the level of average variable cost and the price. At any instant if the price is less than the average variable cost then the firm should shut down and leave the industry in the long run. In this case MC = 4 + 3Q and this implies Because the marginal cost is minimum at $4 when quantity is zero and because quantity is always nonnegative, we expect that the marginal cost is a rising function continuously and therefore it will always lies above the price level of $3. The minimum of average variable cost is achieved when it is equal to marginal cost which means that average variable cost will always be greater than $4. Since at any particular instance average variable cost is greater than the price level which is given at $3 the firm should shut down its operations because it is not able to cover its variable cost at all

Question 2

The marginal revenue is MR = 20 - 2Q. Marginal costs are 2 and 2Q2. Firm will produce where MR = MC

20 - 2(Q1 + Q2) = 2 and 20 - 2(Q1 + Q2) = 2Q2

Q1 + Q2 = 9 and 10 = Q1 + 2Q2

Q1 = 9 - Q2 and substitute this in second equation

9 - Q2 + 2Q2 = 10

Q2 = 1 and Q1 = 9 - 1 = 8

Total quantity = 9 units and price P = 20 - 9 = $11.

Hence the firm should produce 8 units in plant 1 and 1 unit in plant 2 and charge a price of $11.

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