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In this module, it is demonstrated that some times extensive diseconomies of scale

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In this module, it is demonstrated that some times extensive diseconomies of scale, say, due to high transportation costs, would require that the firm produce its product in a multiple of plants. Suppose a beer brewing company has determined that its total production cost is: TC = 10,000 Q - 12 Q2 +.004Q3 where Q is its annual output measured in metric tons.;A. The average hauling (freight) cost is $8Q, AFC = 8Q. Write the firm's average aggregated cost equation.;B. Now suppose the firm is facing the following market demand;Q = 7,600,000 - 100 P;Determine the optimal number of plants that the firm should have to take full advantage of the market demand.;C. Calculate the firm's profit.;D. Compare the firm's profit with multiple plants with its profit with a single plant.;Hint: The firm's MC equation based on its aggregated total cost (including the freight cost) is: MC = 10,000 - 8 Q +.012 Q2

 

Paper#21558 | Written in 18-Jul-2015

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