A software company decided to build a larger factory at a cost of $50 million that would be...

Question

A software company decided to build a larger factory at a cost of $50 million that would be operational for 5 years. At the end of five years the factory would become obsolete and could not be sold used. The company would borrow the money from the loanable funds market at 7% interest. Assume the decisions by the company were made rationally in the interest of the firm.Which of the following statements are true or false. Why?

Employing the new factory would ultimately reduce average total cost. 
The present value of the gain from employing the new factory must be less or equal to $50 million. 
The rate of return from the new factory must be greater than 7%.
Part II
Several years after the factory was in place, more production workers were hired to help fulfill an unusually larger than expected demand for its software. They would hire labor from the region at $10 per hour. Which of the following statements are true or false. Why?

The marginal physical product from the new hires is more than that at the margin from the labor already working at the firm. 
Total production will increase at a diminishing rate. 
The cost of labor at $10 per hour is related to the demand for that labor by other uses.

Robert · Accepted Answer

A software company decided to build a larger factory at a cost of $50 million that would be 
operational for 5 years. At the end of five years the factory would become obsolete and could not 
be sold used. The company would borrow the money from the loanable funds market at 7% 
interest. Assume the decisions by the company were made rationally in the interest of the firm. 
Which of the following statements are true or false. Why?  
1. Employing the new factory would ultimately reduce average total cost.  
Answer: 
This statement is true. This is because if employing a new factory would cause average total cost 
to rise, then there is no point in going for new building. So if decisions were made in the interest 
of the firm, then employing the new factory must ultimately reduce average total cost 
2.

A software company decided to build a larger factory at a cost of $50 million that would be operational for 5 years. At the end of five years the factory would become obsolete and could not be sold...

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