ADJ Enterprises produces hydrothermocorticoids. The table below shows the costs of producing various quantities of hydrothermocorticoids. Quantity Total Cost Average Cost 0 $0 -- 1 $10 $10.00 2 $12 $6.00 3 $15 $5.00 4 $19 $4.75 5 $24 $4.80 6 $30 $5.00 7 $45 $6.43 ADJ sells its hydrothermocorticoids for $5 each (that is the price regardless of the number of hydrothermocorticoids it sells). Use the Profit-Maximizing Rule to explain the quantity that ADJ should produce to maximize its profits. You may use a calculator. You should explain the details of any calculation you perform. You should identify, explain, and apply the concept you use to answer this question. To receive full credit, your explanation must show all steps in any calculations you perform. Your explanation must also incorporate the profit-maximizing rule – state what that rule is and explain how it applies to ADJ’s situation. Note that it is impossible for ADJ to know with accuracy its profits at the start of each production period. The amount of profit (or loss) is typically determined after the production period is over. For example, ADJ may have to purchase fuel at the end of the production period, or buy new thermostats, or purchase liability insurance. ADJ’s accountant will ultimately calculate Total Revenue and Total Cost to determine profits. But that all takes time. This means that ADJ can’t simply calculate Total Revenue minus Total Cost at the start of the production period to determine how many to produce – the information about profit won’t be available until long after decisions are made. So ADJ must apply the logic of the profit-maximizing rule.
ADJ Enterprises produces hydrothermocorticoids. The table below shows the costs of producing various quantities of hydrothermocorticoids.
|
Quantity |
Total Cost
|
Average Cost |
|
0 |
$0 |
-- |
|
1 |
$10 |
$10.00 |
|
2 |
$12 |
$6.00 |
|
3 |
$15 |
$5.00 |
|
4 |
$19 |
$4.75 |
|
5 |
$24 |
$4.80 |
|
6 |
$30 |
$5.00 |
|
7 |
$45 |
$6.43 |
ADJ sells its hydrothermocorticoids for $5 each (that is the price regardless of the number of hydrothermocorticoids it sells).
Use the Profit-Maximizing Rule to explain the quantity that ADJ should produce to maximize its profits. You may use a calculator. You should explain the details of any calculation you perform. You should identify, explain, and apply the concept you use to answer this question. To receive full credit, your explanation must show all steps in any calculations you perform. Your explanation must also incorporate the profit-maximizing rule – state what that rule is and explain how it applies to ADJ’s situation.
Note that it is impossible for ADJ to know with accuracy its profits at the start of each production period. The amount of profit (or loss) is typically determined after the production period is over. For example, ADJ may have to purchase fuel at the end of the production period, or buy new thermostats, or purchase liability insurance. ADJ’s accountant will ultimately calculate Total Revenue and Total Cost to determine profits. But that all takes time. This means that ADJ can’t simply calculate Total Revenue minus Total Cost at the start of the production period to determine how many to produce – the information about profit won’t be available until long after decisions are made. So ADJ must apply the logic of the profit-maximizing rule.
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