1. A company produces two main products: electronic control devices and specialty microchips. The average total cost of producing a microchip is 300.00; the firm then sells the chips to the high-tech manufacturers for $550. Currently, there are enough orders for microchips to keep its factory capacity fully utilized. The company also uses its own chips in the production of control devices. The average total cost (AC) of producing such a device is $500 plus the cost of two microchips. (assume all of the 500.00 cost is variable and AC is constant at different output volumes). Each control device sells for an average price of 1500.00
A. Should the company produce control devices? Is this product profitable?
B. Answer part (a) assuming outside orders for micro chips are insufficient to keep the firm's production capacity fully utilized.
C. Now suppose 200.00 of the average cost of control devices is fixed. Assume. as in part (a), that micro chip capacity is fully utilized. should control devices be produced in the short run? Explain.
2. You are a theatre owner fortunate enough to book a summer box office hit into your single theatre. You are now planning the length of its run. your share of the films projected box office is R=10w-.25w^2, where R is in thousands of dollars and w is the number of weeks that the movie runs. The average operating cost of your theatre is AC=MC=$5 thousand per week.
A. To maximize your profit, how many weeks should the movie run. What is your profit?
B. You realize that your typical movie makes an average operating profit of $1.5 thousand per week. How does this fact affect your decision in part (a), if at all? Explain briefly.
C. In the last 25 years, stand-alone movie theatre have given way to cineplexes, with 4 to 10 screens and megaplexes with 10 to 30 screens under one roof. During the same period, total annual movie admissions have barely changed. what cost factors can explain this trend. In addition what demand factors might be relevant.