Assume you are the plant manager for Crossroads Sign Company, which produces roa

Question

Assume you are the plant manager for Crossroads Sign Company, which produces road signs in a market that approximates perfect competition. Due to a slow economy, business has been slow and the company is losing money every month. The owners have asked you whether to continue operations or to shut down at least until the economy improves. You have the following information available:

Marginal Revenue (MR) = $130
Total Cost (TC) = $1,100 + 135Q + 0.6Q2
Marginal Cost (MC) = 135 + 1.2Q

As the plant manager, should you recommend to the owners that the plant be shut down for a while? Justify your answer using at least two analytical techniques and presenting the information graphically.

Explanation / Answer

The two main techniques use are MC MR approach and TR-TC approach.
MR=MC implies that 135 +1.2Q= 130
Clearly Q is negative, which means that profits cant be maximised. This is possible as the
price, which equals MR in perfect competition is too low to maximise profits. at any Q>) the
firm will make losses.

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