Question

(i just need an answer for question 4)

(i just need an answer for just question 4)

you have two facilities, one in Malaysia and one in Indonesia.

The variable cost curve in the Malaysian plant is described as follows:

VC_M = q_­ + .0005*q² , where q is quantity produced in that plant per month.

The variable cost curve in the Indonesian plant is described by

VC_I = .5q + .00075q², where q is the quantity produced in that plant per month.

The fixed cost per month of the Malaysian plant (when amortized over many years) is $900,000. The fixed cost per month of the Indonesian plant is higher (since it is more modern) at $1,000,000.

The fixed costs of each are sunk.

Questions:

1. Given you can sell as many of these screens as you want for $50 per screen, how many units to you want to produce in Malaysia? How many do you want to produce in Indonesia? What is the average variable cost in Malaysia? What is the average variable cost in Indonesia? Show your work

2. There is another major laptop manufacturer that says they will pay you $60 per screen. Without recalculating your answers to 1, how should you change your production in each plant? Which of the following are true (4 points):

1. You should increase output in both, but increase by more in Malaysia than in Indonesia.
2. You should increase output in both, but increase by more in Indonesia than in Malaysia.
3. You should increase both by exactly the same amount

Explain your answer below.

3. The Malaysian government imposes a tax on each screen produced in Malaysia. Without recalculating, how should you change your production in each plant, which of the following are true (4 points):

Malaysian Plant (circle one):       Increase               Decrease             Keep the same                 

Indonesian Plant (circle one):      Increase               Decrease             Keep the same

Instead of the creating a more modern manufacturing plant in Indonesia, you could have built another plant very similar to the one in Malaysia (i.e., one with the same variable cost curve as your current plant in Malaysia), with a fixed monthly cost of $900,000. Should you have just built another plant like the one in Malaysia? Why or why not. Provide any values of certain variables that support you case

Answer 1

I am not sure which one is question 4. However, you find the solution for the entire question below.

No, another plant with same variable cost and fixed cost of $900,000 should not be built in Malaysia, because it may increase supply, but demand in Malaysia will remain same and the price/average revenue is determined at the market. Because of the plant, the supply will increase in Malaysia, which will shift the market supply curve towards right. Since there is no change in demand, the price (average revenue) will fall. Then it will not be as profitable as it used to be in Malaysia. On the other hand, if the screens need to be exported to Indonesia, there will be costs involved (transaportation, administrative etc), which will increase the cost as well. Hence, it is not advisable to build the plant in Malaysia.

Hope this helps. Thanks