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In: Economics

In this module, it is demonstrated that some times extensive diseconomies of scale, say, due to...

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 monthly total production cost is:

TC = 100 Q - 1.2 Q2 + 0 .004Q3  where Q is its monthly output measured in kegs.


A.) The average hauling (freight) cost is $0.8Q; that is: AHC = 0.8Q. Write the firm's average aggregated cost equation.

B.) Now suppose the firm is facing the following market demand:


                                                                                 Q = 4,000 - 10 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 = 100 - 0.8 Q + 0 .012 Q2

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Rahul Sunny answered 2 years ago
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