Determine the average cost function

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Reference no: EM13190218

Suppose a firm can choose between producing one of two products for sale.

Product 1: Selling Price / Unit : $30. Fixed Cost of Production : $2000. Per Unit Variable Cost : $8.

Product 2: Selling Price / Unit : $45. Fixed Cost of Production: $4,900. Per Unit Variable Cost : $10.

For the break even sales of Product 2, I got 140. [4,900 / (45-10)]

For the break even price assuming 125 units are sold, I got $24. [(2000/125)+8]

For product 1, the average cost function is AC(X)=_____________, if X represents the number of units produced per week. I got (2000+(8x))/x for that blank.

I said that product 1 exhibits economies of scale.

Assuming all of those are right, I'm struggling with the last part only:

If the firm can only produce one product and seeks to maximize weekly profit, write a condition that indicates when the firm should choose to produce Product 2 (where this condition is a function of the number of units sold per week).

Reference no: EM13190218

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