Problem 1: At a recent meeting, the president and the CEO of Production, Inc. go
ID: 1187227 • Letter: P
Question
Problem 1: At a recent meeting, the president and the CEO of Production, Inc. got into a heated argument about whether or not to shut down the company’s plant in Flint, Michigan. The plant currently loses $50,000/month. The president of Production, Inc. argued that the plant should continue to operate until a buyer is found for the facility. This argument was based on the fact that the plant’s fixed costs are $61,000/month. The CEO disagreed over this point, arguing that fixed costs do not matter in making the shutdown decision.
Problem 2: A monopolist has determined that marginal revenue is $2.00 and average cost is $1.75. It has also determined that the lowest sustainable average cost is $1.75. To maximize profit, should the firm lower its price, increase its price, or leave the price unchanged? How would you change your response if marginal revenue is $1.50? Explain your responses.
Explanation / Answer
part a) If the plant is operating, $60,000 a month is being lost.
If the plant were not operating, $68,000 a month is being lost.
Would you rather lose more or less money per month? If you want to be a successful business person, I would suggest you choose losing less, so it makes more sense to keep operating and losing $60,000 a month in the short run.
How would I explain it to the incorrect party? You have two choices. Choice 1: lose $60,000 a month. Choice 2: lose $68,000 a month. What constitutes that lose is irrelevant. It's lose $60,000 or $68,000 on the bottom line.
part b) to maximise profit , price should decrease