Complete the following problems:
Problem 1: At a recent meeting, the president and the CEO of Production, Inc. got into a heated argument about whether or not to shut down the company's plant in Flint, Michigan. The plant currently loses $50,000/month. The president of Production, Inc. argued that the plant should continue to operate until a buyer is found for the facility. This argument was based on the fact that the plant's fixed costs are $61,000/month. The CEO disagreed over this point, arguing that fixed costs do not matter in making the shutdown decision.
- Consider both sides of the argument and come to a decision of whether to close the plant or continue to operate it.
- How would you explain to either the president or the CEO that he or she is wrong?
Problem 2: A monopolist has determined that marginal revenue is $2.00 and average cost is $1.75. It has also determined that the lowest sustainable average cost is $1.75. To maximize profit, should the firm lower its price, increase its price, or leave the price unchanged? How would you change your response if marginal revenue is $1.50? Explain your responses.