1. A firm has three different production facilities, all of which produce the same product. While reviewing the firm’s cost data, Ron, a manager, discovered that one of the plants has a higher average cost than the other plans and suggests closing this plant. Another manager, Jack, notes that the high- cost plant has high fixed costs but that the marginal cost in this plant is lower than in the other plants. He says that the high-cost plant should not be shut down but should expand its operations. Who is right?
1. A firm has three different production facilities, all of which produce the same product. While reviewing the firm’s cost data, Ron, a manager, discovered that one of the plants has a higher average cost than the other plans and suggests closing this plant. Another manager, Jack, notes that the high- cost plant has high fixed costs but that the marginal cost in this plant is lower than in the other plants. He says that the high-cost plant should not be shut down but should expand its operations. Who is right?
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter12: The Cost Of Production
Section: Chapter Questions
Problem 4CQQ
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Question
1. A firm has three different production facilities, all of which produce the same product. While
reviewing the firm’s cost data, Ron, a manager, discovered that one of the plants has a higher average
cost than the other plans and suggests closing this plant. Another manager, Jack, notes that the high-
cost plant has high fixed costs but that the marginal cost in this plant is lower than in the other plants.
He says that the high-cost plant should not be shut down but should expand its operations. Who is
right?
reviewing the firm’s cost data, Ron, a manager, discovered that one of the plants has a higher average
cost than the other plans and suggests closing this plant. Another manager, Jack, notes that the high-
cost plant has high fixed costs but that the marginal cost in this plant is lower than in the other plants.
He says that the high-cost plant should not be shut down but should expand its operations. Who is
right?
2. Should a firm shut down if its weekly revenue is $1,000, its variable cost is $500, and its fixed cost is
$800, of which $600 is avoidable if it shuts down? Explain.
$800, of which $600 is avoidable if it shuts down? Explain.
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