(3) Locations of Transfer-Oriented Firms Assume the distance between the resourc
ID: 1139158 • Letter: #
Question
(3) Locations of Transfer-Oriented Firms Assume the distance between the resource (R ) and the market (M) is 10 miles. A firm’s procurement cost is given by PC=x2, where x is the distance from the resource measured in miles. The firm’s distribution cost is given by DC=100-0.5x2. Again, x is the distance from the resource. (a) What is the Total Freight Cost at each milestone (i.e., x=1, 2, 3, …). Where should the firm locate? (b) How does your answer to all parts under (a) change if the marginal procurement cost were equal to zero?
Explanation / Answer
Answer:
Transfer Oriented Firms are the forms where transport cost is the dominant factor for location decision. Transport cost comprises of Procorement Cost (PC) and Distribution Cost (DC).
(a) Total freight cost will be the sum total of PC plus DC.
Total Freight Cost = x^2+(100 - 0.5x^2)
= 100 + 0.5x^2
If we look at the cost minimising option in the above table for the firm then it should locate at zero distance where the cost is minimum at 100. Total cost will increase as the value of x increases.
(b) If marginal procurement cost is zero for all the distance options (1 to 10) then it indicates that PC remains zero irrespective of the distance between Resource (R) and Market (M). The total cost will be:
TC = PC + DC
= 0 + 100 - 0.5x^2
= 100 - 0.5 x^2
The table will be as below:
The firm would locate at distance of 10 miles where the total cost is minimum at 50.
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