11. Suppose the following is shows the variable costs of the final manufacturing
ID: 1169355 • Letter: 1
Question
11. Suppose the following is shows the variable costs of the final manufacturing division of a product. The price of the good sold to wholesalers is $8.10.
Q TVC Q TVC
0 0 5 32
1 8 6 39
2 15 7 47
3 21 8 56
4 26
(a) The company has an incentive pay plan for the plant manager. Assume that the plant manager’s reward rises the lower is the manufacturing division’s variable cost per unit. If the plant manager determines output, what do we expect him/her to choose?
(b) Suppose instead that the manager’s rewards rise as depending on the division’s net income. However, the division is “charged” 10% of its revenue to proxy for its share of fixed costs. What output does the manager prefer? (Consider how this effects the manager’s perceived net marginal revenue.)
(c) What is the profit maximizing output? Do the above two attain it? Explain.
Explanation / Answer
(a) In this case, manager will choose the output corresponding to lowest variable cost per unit.
AVC = TVC / Q
AVC is lowest when Q = 5 and AVC = 32 / 5 = 6.4.
This is the output manager will choose.
(b)
The calculations as follows.
It is seen that Net profit is highest when Q = 6. So manager will choose to produce 6 units.
(c) Profit maximizing output is where MR = MC and the table shows that this lies between 6 and 7 units. The 1st option does not attaint it but the 2nd option is close to the profit-maximizing output.
Q P TR = P x Q MR TVC FC TC = FC + TVC MC PROFIT = TR - TC 0 8.1 0 0 1 8.1 8.1 8.10 8 0.81 8.81 8.81 -0.71 2 8.1 16.2 8.10 15 1.62 16.62 7.81 -0.42 3 8.1 24.3 8.10 21 2.43 23.43 6.81 0.87 4 8.1 32.4 8.10 26 3.24 29.24 5.81 3.16 5 8.1 40.5 8.10 32 4.05 36.05 6.81 4.45 6 8.1 48.6 8.10 39 4.86 43.86 7.81 4.74 7 8.1 56.7 8.10 47 5.67 52.67 8.81 4.03 8 8.1 64.8 8.10 56 6.48 62.48 9.81 2.32Related Questions
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