A monopolist owns two plants in which to produce product A. The marginal cost of producing A is increasing, but currently is lower in plant 1 than in plant 2. How should the monopolist allocate production?

Question

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Producing in plant 1 up to the point where marginal costs are equated across the plants will minimize the overall cost of production for the monopolist, as they will not need to incur the higher marginal cost of plant 2 to produce additional units. This will maximize the monopolist's profit. Since marginal cost is lower in plant 1, the monopolist should increase production in plant 1 until its marginal cost equals that of the higher cost plant 2. This approach will minimize the overall cost of production and maximize the monopolist's profit. Producing all output in either plant 1 or plant 2 would not take into account the differences in marginal cost between the two plants, leading to suboptimal outcomes. Producing 50% in each plant also does not take into account the marginal cost differences and does not necessarily result in the lowest cost of production.

A Monopolist Owns Two Plants in Which to Produce Product 1.1 .1.

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