Question

Problem 3

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:

VC_M = q_­ + .0005*q² , where q is quantity produced in that plant per month.

The variable cost curve in the Indonesian plant is described by

VC_I = .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.

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

Answer 1

Malaysia plant,

MC=1+0.001Q

Profit maximizing quantity where P= MC

50=1+0.001Q

Q=49/0.001=49,000

AVC=1+0.0005Q=1+0.0005*49,000=25.5

Profit=(50-25.5)*49,000 -900,000=24.5*49,000-900,000=300,500

Indonesia plant,

MC=0.5+0.0015Q

Profit maximizing quantity;

50=0.5+0.0015Q

Q=49.5/0.0015=33,000

AVC=0.5+0.00075Q=0.5+0.00075*33,000=25.25

Profit=(50-25.25)*33,000 -1,000,000=24.75*33,000 -1,000,000=-183,250

So Indonesia plant will result in loss, so firm should make one more plant in Malaysia.