Consider a small firm that is producing winter jackets.It can lease an additional sewing machine for one month for $1200.With this additional machine,the firm can produce an additional 7 jackets during that time period that it sells for $250 each.Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine.
A)-$1200; not lease
B)$0; be indifferent as to whether to lease
C)$1200; lease
D)$550; lease
E)$1750; lease

Question

Quizplus · Accepted Answer

By leasing the additional sewing machine, the firm can produce an additional 7 jackets, which it can sell for a total of 7 x $250 = $1750.

Leasing the machine costs $1200, so the net increase in profit is $1750 - $1200 = $550.

Therefore, the firm should lease the machine to maximize its profit.

Option D is the correct answer, as it states that hiring the marginal machine adds $550 to the firm's profit, and so it should lease the machine.

Consider a Small Firm That Is Producing Winter Jackets