A firm produces digital watches on a single
production line serviced during one daily shift; The...

Question

A firm produces digital watches on a single
production line serviced during one daily shift; The total output of watches
depends directly on the # of labor hrs employed on the line. Max capacity =
120k watches per month: this output requires 60k hrs of labor per month. Total fixed
cost =600k per month, wage rate =$8 per hr and variable costs avg $6 per watch.
The marketing estimate of demand is P=28-Q/20000 where P denote price in $’s
and Q is monthly demand.

How many additional watches can be produced
by an extra hr of labor? What is MC of any additional watch? As a profit maximizer
what price and output should the firm set? Is production capacity fully
utilized? What contribution does this product line provide?

The firm can increase capacity to 100% by
scheduling a night shift. The wage rate
= $12 per hr. Answer questions in part A in light of new option

Suppose demand for the firm’s watches fall
permanently to P=20-Q/20000. With the fall of demand, what output should the
firm produce in the short run, in the long run? Explain.

David · Accepted Answer

A firm produces digital watches on a single production line serviced during one daily shift; The 
total output of watches depends directly on the # of labor hrs employed on the line. Max capacity 
= 120k watches per month: this output requires 60k hrs of labor per month. Total fixed cost 
=600k per month, wage rate =$8 per hr and variable costs avg $6 per watch. The marketing 
estimate of demand is P=28-Q/20000 where P denote price in $’s and Q is monthly demand. 
a) How many additional watches can be produced by an extra hr of labor? What is MC of 
any additional watch? As a profit maximizer what price and output should the firm set? Is 
production capacity fully utilized? What contribution does this product line provide? 
Answer: 
Suppose Q denote watches produced and L denote labor hours 
Since to produce 120000 watches per month, we require 60000 hours of labor per month, this 
implies that the productivity of one labor is 2 watches and therefore production function is given 
as: 
Q = 2L …………………………………. (1) 
Total fixed cost = $600000 
Wage rate $8 and other variable cost $6 per watch 
Since one unit of labor produces two units of watches,

A firm produces digital watches on a single production line serviced during one daily shift; The total output of watches depends directly on the # of labor hrs employed on the line. Max capacity...

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