In YEAR 1, the price of gadgets is $2, while the price of the single variable...

In YEAR 1, the price of gadgets is $2, while the price of the single variable input used is $28. A profit-maximizing gadget producer uses 9 units of input to produce and sell 252 units of gadgets, earning profit of $2*252 - $28*9 = $252 In YEAR 2, the price of gadgets is $3, while the price of the single variable input used is $18. A profit-maximizing gadget producer uses 49 units of input to produce and sell 588 units of gadgets, earning profit of $3*588 - $18*49 = $882 A production plan is feasible if it lies BELOW a firm's iso-profit lines. Which of the following production plans (input-output combinations) are feasible for (within the technology set of) a profit-maximizing gadget producer?

(a) use 15 units of input to produce 330 units of gadgets

(b) use 20 units of input to produce 400 units of gadgets

(d) use 30 units of input to produce 470 units of gadgets

Solutions

Expert Solution

Isoprofit lines are the set of curves on which combination of input and output gives the same amount of profit generated.

For year 2, price of gadgets is $3 and price of single variable input is $18.

At the profit maximizing level, quantity of input = 49 units and quantity of output = 588 units.

Thus profit generated = $3*588 - $18*49 = $882

Now consider all given options:

use 15 units of input to produce 330 units of gadgets'

Profit generated = $3*330 - $18*15 = $720 < $882 (Feasible production plan)

use 20 units of input to produce 400 units of gadgets

Profit generated = $3*400 - $18*20 = $840 < $882 (Feasible production plan)

use 25 units of input to produce 450 units of gadgets

Profit generated = $3*450 - $18*25 = $900 > $882 (Not feasible production plan)

use 30 units of input to produce 470 units of gadgets

Profit generated = $3*470 - $18*30 = $870 < $882 (Feasible production plan)

Hence production plans (a), (b) and (d) are feasible for (within the technology set of) a profit-maximizing gadget producer.

Rahul Sunny answered 9 months ago

Next > < Previous

Related Solutions

Welker Products sells small kitchen gadgets for $15 each. The gadgets have a variable cost of...

Welker Products sells small kitchen gadgets for $15 each. The gadgets have a variable cost of $4 per unit, and Welker Products' fixed operating costs are $220,000 per year. Welker Products' capital structure includes 55% debt and 45% equity. Annual interest expense is $25,000, and the corporate tax rate is 35%. a. Calculate the break-even point in units. b. If Welker Products sells 25,000 units, calculate the firm's EBIT and net income. c. If sales increase ten percent from 25,000 units to 30,000...

Putih Berhad sells small kitchen gadgets for RM15 each. The gadgets have a variable cost of...

Putih Berhad sells small kitchen gadgets for RM15 each. The gadgets have a variable cost of RM4 per unit, and Putih Berhad fixed operating costs are RM220,000 per year. Putih Berhad capital structure includes 55% debt and 45% equity. Annual interest expense is RM25,000 and the corporate tax rate is 35%. Required: a) Calculate the break-even point in units b) If Putih Berhad sells 25,000 units, calculate the firm's EBIT and net income. c) If sales increase 20% from 25,000...

___ 1. Lester Company has a single product. The selling price is $50 and the variable...

___ 1. Lester Company has a single product. The selling price is $50 and the variable cost is $30 per unit. The company’s fixed expenses are $200,000 per month. What is the company’s unit contribution mar- gin? a) $50; b) $30; c) $20; d) $80. ___ 2. Refer to the data for Lester Company in question 1 above. What is the company’s contribution margin ratio? a) 0.60; b) 0.40; c) 1.67; d) 20.00. ___ 3. Refer to the data for...

1 year Treasury rates are 2%, while 2 year Treasury rates are 6%. What is the...

1 year Treasury rates are 2%, while 2 year Treasury rates are 6%. What is the expected 1 year Treasury rate one year from today?

1 year Treasury rates are 1%, while 2 year Treasury rates are 7%. What is the...

1 year Treasury rates are 1%, while 2 year Treasury rates are 7%. What is the expected 1 year Treasury rate one year from today?

Variable 1 Variable 2 Variable 3 Variable 1 Variable 2 - .18 Variable 3 - .30...

Variable 1 Variable 2 Variable 3 Variable 1 Variable 2 - .18 Variable 3 - .30 .27 Variable 4 - .74* .60* .34 Note: * = p < .05 A) What is the proportion of variance in variable 1 that is predicted by variable 3? B) What is the proportion of the variance in variable 2 that is not predicted by variable 4? What are the steps I need to take to solve this problem?

A gadgets producer currently manufacture 300,000 unit per year. it buts gadgets lids from an outside...

A gadgets producer currently manufacture 300,000 unit per year. it buts gadgets lids from an outside supplier at a price of 2.1$ per lid. the plant manager believes that it would be cheaper to make these lids rather than buy them. direct production cost are estimated to be only 1.6$ a lid. the neccessary machinery would cost 155000$ and would last 10 years. this investment could be written off for tax deprecition schedule. the plant manager estimates that the operation...

Initially, the market price is pequals19, and the competitive firm's average variable cost is 18, while...

Initially, the market price is pequals19, and the competitive firm's average variable cost is 18, while its average cost is 21. Should it shut down? Why? This firm should A. shut down because average cost is greater than the market price. B. not shut down because average fixed cost is less than the market price. C. shut down because average fixed cost is less than the market price. D. not shut down because average variable cost is less than...

A firm produces a single output using two variable inputs (denoted ?1 and ?2). The firmproduction...

A firm produces a single output using two variable inputs (denoted ?1 and ?2). The firmproduction function is given by ? = Φ(?1, ?2) = (?1?2) ^0.5. The firm can employ as much of either input it desires by incurring constant (and respectively denoted) per-unit input costs of ?1 and ?2. Assume throughout that all prices and quantities are positive and infinitely divisible. Finally, let ?0 denote the “target” level of output that the firm envisions producing when deciding how...

Case Study 2 Gadgets Electronics, LLC is producing four gadgets microphone, headphone, webcam and memory stick....

Case Study 2 Gadgets Electronics, LLC is producing four gadgets microphone, headphone, webcam and memory stick. Gadgets Electronics till now applying traditional costing method to determine the total cost and cost per unit of each gadget. Company wants to switch to ABC system in order to understand the accurate performance of each gadget. You have given this job to compare between both costing methods in order to determine which product is more profitable to the company and which one is...

Subjects