Question

1. Jones Industries has a monopoly on the tennis ball market and they have two factories. Plant 1 has MC1 = 0.005Q1 and Plant 2 with MC2 = 6.   The fixed costs of operating each plant are zero. Jones is currently producing 1,400 units at Plant 1 and 800 units at Plant 2.

1. What could Jones Industry do to save on production costs while maintaining the same output? For full credit draw on the graph below the two MC curves. (Hint-doing this will allow you to find the optimal output that minimizes the total cost of production).   

2. Rearranging output between the two plants saves Jones Industries how much money and since the costs of production have been lowered what should they do with output now?

Answer 1

A) MC1=0.005q1, q1=200MC1

MC2=6

So to minimize cost seller will produce from plant 1 till MC1=6 and the rest of the production will be produced at fixed MC from plant 2.

So,

Q1=200*6=1200

So firm should Produce 1200 units from plant 1 and rest 1000 from plant 2.

B)MC1=0.005q1

TC1=0.0025*q1^2

TC2=6*q2

So Initial TC=0.0025*1400*1400+6*800=9700

After redistribution of output,TC=0.0025*1200*1200+6*1000=9600

So seller saved 100$ by redistributing the production.

ATC initial=9700/2200=4.41

New AC=9600/2200=4.36.36

If PRODUCTION Decrease by 1 unit,AC=9694/2199=4.3628

So to produce at efficent level,firm should Decrease Production.