Let us suppose that you are the chief investment officer, as well as VP for Production, for the ABC Monopoly. You face the inverse demand function Pd=70-Q which you expect to be stable over the next several years. You have two plants at your disposal but are currently only using #1 which has a marginal cost function of MC1= Q (This suggests that your total costs are TC1=Q2/2).
- How much Q will you produce, what will its price be, and what are your profits?
- Your company owns another plant that your predecessor, for whatever reason, did not use. The marginal cost for that plant is MC2=10 + 2Q (with TC2=10Q+Q2 ) Would you use this plant? Explain and illustrate..
- Suppose a third plant becomes available as a rental. You have to pay the production costs of the new plant plus a rental fee of $300 a year. The MC for this plant is MC=4. Would you rent it? Why or why not?