Question

Company A is looking to expand. it decides to take over company B, a competitor. The two companies have similar technology, but different costs.

Company A has $1800 fixed costs and $2 marginal cost per unit produced

Company B has $600 fixed costs and $3 marginal cost per unit produced

AT WHAT LEVEL OF OUTPUT WILL COMPANY A BE INDIFFERENT BETWEEN THE TWO TECHNOLOGIES?

Please explain the process, i am struggling with this thanks

Answer 1

Let q be the level of output at which the company will be indifferent between the two technology.

With technology 1 (i.e., fixed cost of $1800 and marginal cost of $2), the total cost to produce q units of output will be 1800 + 2q. Similarly, with technology 2 (i.e., fixed cost of $600 and marginal cost of $3), the total cost to produce q units of output will be 600 + 3q.

The company will be indifferent between the two technology if the total cost from each of the technology would be same, i.e., 600 + 3q = 1800 + 2q

=> 3q - 2q = 1800 - 600

=> q = 1200

Therefore, at output level of 1200 (i.e., q = 1200), the company will be indifference between the two technologies).