Q1) A firm produces digital watches on single production line serviced during one daily shift. Total output of watches depends directly on number of labor hours employed on the line. Maximum capacity of line is 120,000 watches per month: this output needs 60,000 hours of labor per month. Total fixed costs come to $600,000 per month, wage rate averages $8 per hour, and other variable costs are $6 per watch. Marketing departments estimate of demand is P = 28 - Q/20,000, where P denotes the price in dollars and Q is monthly demand.
a) How many extra watches can be manufactured by extra hour of labor? Determine the marginal cost of an additional watch? As profit maximizer, what price and output must the firm set? Is production capacity fully utilized? What contribution does this product line provide?
b) Firm up to 100% by scheduling a night shift. Wage rate at night averages $12 per hour. Answer the questions in part A in light of this additional option.
c) Assume demand for firms watches falls permanently to P = 20 - Q/20,000. In view of this fall in demand, what output must the firm produce in short run? In the long run? Describe.