A firm with two factories, one in Michigan and one in Texas, has decided that it should produce a total of 500 units to maximize profit. The firm is currently producing 200 units in the Michigan factory and 300 units in the Texas factory. At this allocation between plants, the last unit of output produced in Michigan added $5 to total cost, while the last unit of output produced in Texas added $3 to total cost.
a. Is the firm maximizing profit? If so, why? If not, what should it do?
b. If the firm produces 201 units in Michigan and 299 in Texas, what will be the increase (decrease) in the firm's total cost?
a. The firm is not maximizing profits. To increase profits it should shift some production from Michigan to Texas. Assuming the firm has no control over market price when the firm produces a unit at $5 in Michigan while it can produce the same unit in Texas at $3, then it is effectively incurring ...
This solution contextualizes maximizing profits.