You work at a firm that makes fountain pens. The marginal cost of producing a fo

Question

You work at a firm that makes fountain pens. The marginal cost of producing a fountain pen at your firm is given by the equation:

MC = 5 + .01q

The price people will pay for a fountain pen varies from year to year depending on what happens at the annual hipster convention. There, a buffalo nickle is flipped and in years when it lands "tails" up, the price of a fountain pen will be $50, however in all other years the price will be $40. Sadly, you must make your production decision before these coins are flipped. You do your best to maximize profits by setting E[MR] = MC, but you are always off a bit. What would be the value of changing the timing of your production run in order to know exactly what the price of a fountain pen will be?

Question options:

$5

$500

$1,250

$2,500

$5

$500

$1,250

$2,500

Explanation / Answer

Marginal Cost

MC = 5 + 0.01q

Tails = 50

Rest = 40

E(MR) = 45

45 = 5 + 0.01 q

40 = 0.01 q

q = 40 / 0.01

q = 40 * 100 = 4000

40 = 5 + 0.01q

35 = 0.01q

35 / 0.01

3500

At price = 50

MC = 5 + 0.01 q

45 = 0.01 q

4500 = q

1/ 2 { - 5*3500 + 5*4500 } = 1/2 * 5000

= 2500

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