Question

In: Economics

Let’s assume that we have a firm that produces 2 products, Skilly Wigglers and Juniper Jumpers, at their two rented factories in Waco, Texas.

Let’s assume that we have a firm that produces 2 products, Skilly Wigglers and Juniper Jumpers, at their two rented factories in Waco, Texas. The firm’s accountants have put together the following table of costs and as their crackpot, I mean, Cracker Jack economist, they are asking for your advice.


Skilly Wigglers

Juniper Jumpers

Fixed Costs

$2 million

$2 million

Variable Costs

$2 million

$2 million

Revenue

$3 million

$5 million







The accountants have assured us that there are no places to save money. We are at our profit maximizing quantities of each product. We are as efficient as any firm could possibly be, so do not just say lower costs or increase sales. Explain all your answers. If you cannot explain why you are taking an action then you are just guessing.

  1. How is this firm doing as a whole? How profitable are the two products individually?

  2. What would you recommend this firm do in the short run?

  3. What about the long run?

Solutions

Expert Solution

a. As a whole considering both the products together, the firm is breaking even. It is neither earning profits nor incurring losses. This is because total cost of both the products together is equal to total revenue earned from both the products together. Thus, the firm is breaking even. If we consider the two product individually, then it can be stated that Juniper Jumpers is profitably more valuable as compared to Skilly Wigglers because the firm is earning profit of $1 million by selling Juniper Jumpers but incurring losses equal to $1 million by selling Skilly Wigglers.

b. In the short run, the firm should increase production of Juniper Jumpers because it is more profitable for the firm to produce Jumpers. On the other hand, the production of Skilly Wigglers should be reduced to earn higher profits in the short run.

c. In the long run, the firm should concentrate its resources on the production of Juniper Jumpers which is more profitable for the firms and will increase its overall profits and stop production of Skilly Wigglers which is leading to losses for the firm.

Rahul Sunny answered 2 years ago
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