Answer the follwing question and the graph: 1. The Invisible hand Suppose you ow

Question

Answer the follwing question and the graph:

1. The Invisible hand Suppose you own two factories that produce widgets. Factory 2 is suitably located near a firm that sells raw materials needed to make widgets, whereas Factory 1 is in a more remote location and thus has higher transportation costs. Assume zero fixed costs for both factories. The graph below illustrates the marginal cost (MC) for producing widgets in each of these factories. You need to produce 24,000 widgets, and you have three options to allocate your production. Option I. Produce all 24,000 widgets In Factory 2, which is more efficient than Factory 1. Option II. Produce 12,000 widgets each in Factory 1 and Factory 2. Option III. Allocate production of 24,000 widgets such that the marginal costs are equalized between the two factories. Calculate the total costs (TC) of production under each of the options, and enter them in thousands in the table below. (Hint: The area under the MC curve gives you the total cost. To determine total costs, you can either calculate the area yourself or use the green points (triangle symbols) or the purple points (diamond symbols) on the graph to shade the area representing total costs for each. After you place a triangle in the appropriate region on the graph, hover your mouse over the triangle to get its area. You will not be graded on where you place the triangles.) TC (Factory 1) TC (Factory 2) TC (Factory 1 + Factory 2) (Thousands of dollars) (Thousands of dollars) (Thousands of dollars) Option 1 $0 $ $ Option II $72 $36 $108 Option III $32 $ $ Which option minimizes the total cost of production? Option Ill Option I Option II

Explanation / Answer

option 3

Equalized marginal cost, this will give the lowest cost for production. Based on individual firm cost of production you produce the quantity.

MC1= MC2 =8

Q1= 8000

Q2 = 16000

2.

option 3 minimise total cost. as at that point MC1= Mc2

TC1 TC2 TC1+Tc2 Option 1 (q1 = 0, q2=24) 0 144 144 Option 2 (q1 = 12, q2=12) 72 36 108 Option 3 (q1 = 8, q2 =16) 32 64 96

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