Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 14

You are a manager at Spacely Sprockets-a small firm that manufactures Type A and Type B bolts. The accounting and marketing departments have provided you with the following information about the per-unit costs and demand for Type A bolts:
Materials and labor are obtained in a competitive market on an as-needed basis, and the reported costs per unit for materials and labor are constant over the rele­vant range of output. The reported unit overhead costs reflect the $10 spent last month on machines, divided by the projected output of 2 units that was planned when the machines were purchased. In addition to the above infonnation, you know that die firm's assembly line can produce no more than five bolts. Since the firm also makes Type B bolts, this means that each Type A bolt produced reduces the number of Type B bolts that can be produced by one unit; the total number of Type A and B bolts produced cannot exceed 5 units. A call to a rep­utable source has revealed that unit costs for producing Type B bolts are identi­cal to those for producing Type A bolts, and that Type B bolts can be sold at a constant price of $4.75 per unit. Detenninc your relevant marginal cost of pro­ducing Type A bolts and your profit-maximizing production of Type A bolts.