Suppose a firm producing table lamps has the following costs: Quantity Average Total Cost 1,000 $15.00 2,000 9.75 3,000 8.25 4,000 7.50 5,000 7.75 6,000 8.50 7,000 9.75 8,000 10.50 9,000 12.00 Ben and Jerry are managers at the company, and they have this discussion: Ben: We should produce 4,000 lamps per month because that will minimize our average costs. Jerry: But shouldn't we maximize profits rather than minimize costs? To maximize profits, don't we need to take demand into account? Ben: Don't worry. By minimizing average costs, we will be maximizing profits. Demand will determine how high the price we can charge will be, but it won't affect our profit-maximizing quantity. Evaluate the discussion between the two managers. Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is A. incorrect because profits are instead maximized at the quantity where marginal cost equals price, which may be different since price depends on consumer demand. B. correct because this is the same quantity that maximizes profits where marginal cost equals marginal revenue since consumer demand does not affect marginal cost or marginal revenue. C. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since the marginal cost of production is greater than the average cost when average costs are minimized. D. correct because this level of production occurs on the firm's minimum efficient scale, which is unaffected by consumer demand. E. incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose a firm producing table lamps has the following costs:

Quantity	Average Total Cost
1,000	$15.00
2,000	9.75
3,000	8.25
4,000	7.50
5,000	7.75
6,000	8.50
7,000	9.75
8,000	10.50
9,000	12.00

Ben and Jerry are managers at the company, and they have this discussion:

Ben:

We should produce 4,000 lamps per month because that will minimize our average costs.

Jerry:

But shouldn't we maximize profits rather than minimize costs? To maximize profits, don't we need to take demand into account?

Ben:

Don't worry. By minimizing average costs, we will be maximizing profits. Demand will determine how high the price we can charge will be, but it won't affect our profit-maximizing quantity.

Evaluate the discussion between the two managers.

Ben's assertion that the firm should produce the quantity of lamps where average costs are minimized is

incorrect because profits are instead maximized at the quantity where

marginal cost

equals

price,

which may be different since price depends on consumer demand.

correct because this is the same quantity that maximizes profits where marginal cost equals marginal revenue since consumer demand does not affect marginal cost or marginal revenue.

incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since the marginal cost of production is

greater

than the average cost when average costs are minimized.

correct because this level of production occurs on the firm's minimum efficient scale, which is unaffected by consumer demand.

incorrect because profits are instead maximized at the quantity where marginal cost equals marginal revenue, which may be different since marginal revenue depends on consumer demand.

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