Suppose you own two factories that produce widgets. Factory 2 is suitably locate

Question

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. 24 TC (Factory 1) 20 MC (Factory 1) 16 TC (Factory 2) MC (Factory 2) 12 12 16 20 24 QUANTITY (Thousands) You need to produce 18,000 widgets, and you have three options to allocate your production

Explanation / Answer

Answer 1 : Table showing information :

TC ( Factory 1 + Factory 2)

In the above table , the total cost of factory 2 is calculated as follows :

Factory 2 ( Total cost )

Quantity marginal cost Total cost

0 0 0

4000 2 8000

8000 4 24000

12000 6 48000

16000 8 80000

18000 9 98000

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Factory 1 : Total cost table :

Quantity MC Total cost

0 0 0

4000 4 16000

8000 8 48000

12000 12 96000

16000 16 160000

18000 18 196000

From the above table we have fill the values .

Option 3 is the best option as the total cost has been minimised where marginal cost of production are equal in this scanerio where as option 2 and option 1 has compartive higher cost in this time period.

Particulars TC (Factory 1 ) TC (Factory 2 )

TC ( Factory 1 + Factory 2)

Option 1 $0 1.$98 $98 Option 2 $40.50 $20.25 $60.75 Option 3 $18 2.$31.5 3.$49.5

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