Question

Your firm manufactures flat-screen video monitors that are sold to a major laptop producer who pays $50 per screen. The major laptop producer has said they will take as many screens as you want to sell at that price. You have two facilities, one in Malaysia and one in Indonesia. The variable cost curve in the Malaysian plant is described as follows: VCM = q¬ + .0005*q2 , where q is quantity produced in that plant per month. The variable cost curve in the Indonesian plant is described by VCI = .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. (8 points)

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): a. You should increase output in both, but increase by more in Malaysia than in Indonesia. b. You should increase output in both, but increase by more in Indonesia than in Malaysia. c. 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 Explain your answers below.

4. 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. (8 points)

Answer 1

1.

2. option b that is I will increase output both but more in Insonesia than in Malaysia because average variable cost or the cost of production is more in Malaysia .

3.As Malaysian govt imposed tax on each screen production, there the cost of production will increase there than before and profits fall down. Therefore as a producer , i will decrease production in Malaysia and starts producing more in Indonesia.

4.No. as compare to Indonesia cost of production is more due to more AVC and imposition of taxes by government of Malaysia ,so profit decrease. It is profitable and rational for produder to increase more production of the same product with less cost and more profits to earn due to high price per unit of the product.