You’ve been hired as an economic consultant to a price-taking firm that produces
ID: 1220982 • Letter: Y
Question
You’ve been hired as an economic consultant to a price-taking firm that produces shirts. The firm already has a shirt factory, so it is operating in the short run. The price of shirts is $5, the hourly wage is $12, and each shirt requires $1 worth of material. At the current level of output (20 workers and 70 shirts per hour), the firm is losing money: Its total cost exceeds it total revenue. The firm has experimented with fifferent numbers of workers and discovered that 21 workers would produce 72 shirts; 15 workers would produce 60 shirts; and 16 workers would produce 63 shirts. You job as a consultant is to tell the firm which of these four options to take; and explain and show your calculations as to why you selected an option. 1. Option 1: Shut down the unprofitable operation. Explain why giving numerical calculations? 2. Option 2: Continue to produce 70 shirts per hour. Explain why giving numerical calculations? 3. Option 3: Produce more shirts. Explain why giving numerical calculations? 4. Option 4: Produce fewer shirts. Explain why giving numerical calculations?
Explanation / Answer
The answe to this question is produce fewer shirts which is option d
While calculating we see that as the quantity produced decreases, the Average cost decreases and the marginal revenue increases. This can be shown as
Quantity Average Cost Marginal Revenue 60 4 7.5 63 4.04 5 70 4.42 5 72 4.5 5Related Questions
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