Max Whitley, manager of Whitley Construction, builds new homes in a booming comm
ID: 1251770 • Letter: M
Question
Max Whitley, manager of Whitley Construction, builds new homes in a booming community in the Midwest. Although the sales have slowed down because of a national recession, it now looks as if the recession is about to end. Max wants to be ready with material, labor and foremen to meet the demand for housing. Last year, Max built and sold 40 ‘starter homes’, the most popular model. With a recent recession over, Max thinks that his sales will increase to 50 units for the current year. The going market price for this model (which Max and his numerous competitors have charged) has been $75,000. In addition, Whiteley Construction’s marginal cost of building this model averages $55,000. Based on these facts, suggest a course of action for Max. Suppose the economic boom raises the cost of labor and raw materials, so that the additional cost of a starter house raises to $65,000. What is Max’s most profitable course of action?Explanation / Answer
marginal revenue = change in total revenue / change quantity Right now marginal revenue is still 75,000 becuase there is no indication that the price will increase or decrease if more houses are built. By comparing the current marginal expense of 55,000 as well as the possible new expense of 65,000 you should be able to come up with a course of action.