The Food Processing Industry Involves the Canning of Fruit Products

question 1

Essay

The food processing industry involves the canning of fruit products, among other things, and the canning process produces canned goods and waste products. The manufacturer of one kind of fruit product produces an external cost for third parties. This external cost is expressed as:
MEC = 0.00005Q,
where MEC represents marginal external cost (dollars/unit), and Q represents cases produced per week. The marginal cost of production (supply), ignoring MEC, at the industry level is:
MC = 2 + 0.000175Q.
The industry demand for the product is:
P = 10 - 0.00025Q,
where price P is in dollars per unit.
a. Determine the output rate and price that would be established by profit maximizing firms.
b. Determine the efficient output rate and price.
c. Determine the cost to society of firms producing at the profit maximizing rate rather than at the efficient output rate.

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Definitions:

Variable Costs

Expenses that fluctuate directly with changes in production volume or activity level, such as raw materials and direct labor costs.

Flexible Budgets

Budgets that can adjust or flex for changes in the volume of activity or other relevant factors, allowing for more accurate forecasts and analysis.

Contribution Margin

The selling price per unit minus the variable cost per unit, representing the incremental money generated for each product/unit sold.

Fixed Budget

A budget that is set for a specific period and does not change, regardless of variations in activity levels, sales volume, or other external factors.