Scenario 1-1

Suppose a t-shirt manufacturer currently sells 5,000 t-shirts per week and makes a profit of $10,000 per week. A manager at the plant observes, "Although the last 400 t-shirts we produced and sold increased our revenue by $4,000 and our costs by $4,800, we are still making an overall profit of $10,000 per week so I think we're on the right track. We are producing the optimal number of t-shirts."

-Refer to Scenario 1-1.Had the firm not produced and sold the last 500 cigars,would its profit be higher or lower,and if so by how much?
A)Its profit will be $500 higher.
B)Its profit will be $1,000 higher.
C)Its profit will be $500 lower.
D)Its profit will be $1,500 lower.

Question

Scenario 1-1

Suppose a t-shirt manufacturer currently sells 5,000 t-shirts per week and makes a profit of $10,000 per week. A manager at the plant observes, "Although the last 400 t-shirts we produced and sold increased our revenue by $4,000 and our costs by $4,800, we are still making an overall profit of $10,000 per week so I think we're on the right track. We are producing the optimal number of t-shirts."

-Refer to Scenario 1-1.Had the firm not produced and sold the last 500 cigars,would its profit be higher or lower,and if so by how much?
A)Its profit will be $500 higher.
B)Its profit will be $1,000 higher.
C)Its profit will be $500 lower.
D)Its profit will be $1,500 lower.

Quizplus · Accepted Answer

The production and sale of the last 400 t-shirts lead to an increase in revenue of $4,000 but also led to an increase in costs by $4,800. This means that the production and sale of each t-shirt caused a loss of $20 ($4,800/400). Therefore, if the firm had not produced and sold these last t-shirts, it would have saved $8,000 ($20 x 400) in costs, and its profit would have been $18,000 ($10,000 + $8,000) instead of the current $10,000. This implies that if the firm had not produced and sold these last t-shirts, its profit would be $500 lower than the current profit of $10,000.

Scenario 1-1 Suppose a T-Shirt Manufacturer Currently Sells 5,000 T-Shirts Per Week