a firm produces digital watches on a single production line serviced during one

Question

a firm produces digital watches on a single production line serviced during one daily shift. The total output of watches depends directly on the number of labor hours employed on the line. Maximum capacity of the line is 120,000 watches per month; this output requires 60,000 hours of labor per month. Total fixed costs come to $600,000 per month, the wage rage averages $8 per hour, and other variable costs average $6 per watch. The marketing departments estimate of demand is P = 28 - Q/20,000, where P denotes price in dollars and Q is monthly demand. A. How many additional watches can be produced by an extra hour of labor? What is the marginal cost of an additional watch? As a profit maximizer, what price and output should the firm set? Is production capacity fully utilized? What contribution does this production line provide? B.The firm can increase capacity up to 100% by scheduling a night shift. The wage rate at night averages $12 per hour. Answer the question in part A in light of this additional option. C.Suppose demand for the firms watches falls permanently to P = 20 - Q/20,000. In view of this fall in demand, what output should the firm produce in the short run? In the long run? Explain.

Explanation / Answer

Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C = 50 + 4Q + 2Q ². The associated marginal cost function is MC = 4 + 4Q and the point of minimum average cost is Q min = 5. A. Determine the firm's profit-maximizing level of output. Compute its profit. MC=MR MR =$16 4 + 4Q = 16 4Q = 12 Q= 3 Profit maximizing output is 3 TR-TC TR = P*Q = 16 x 3 = 48 TC = 50+4Q + 2Q ² TC = 50+12 + 18 = 80 Profit = TR - TC = 48 - 80 = -32 B. The industry demand curve is Q = 200-5P. What is the total market demand at the current $16 price? If all firms in the industry have cost structures identical to that of firm Z, how many firms will supply the market? Q = 200 - 5p = 200 - 5*16 Q = 200 - 80 = 120 The number of firms supplying the market would be the Q 120 / 3 (profit maximizing output) = 40 C. The outcomes in part a and b cannot persist in the long run. Explain why. Find the market's price, total output, number of firms, and output per firm in the long run. D. Comparing the short-run and long-run results, explain the changes in the price and in the number of firms. As the industry under perfect competition and in the short run are earning profits. Therefore, in the long run this will give encouragement for the new firms to enter in to the market leading to increase in the overall supply and causing the normal price to fall which results in normal profits in the long run. So, in the long run the price will come down due to increase in the number of firms in the long run. P = AR = MR = AC = MC

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