A Firm Produces Three Products A, B, and C

Question

Examlex · Accepted Answer

The Answer is a.The long-run profit from the business is π = (P – AVC)Q = (5 – 3.5)(10,000) +(7.5 – 5)(12,000) + (10 – 7.5)(8,000) – 60,000 = $5,000. The firm should continue to operate in the long run.
b.For good A the profit

\pi

= (1.5)(10,000) - .33(60,000) = -$4,800. For good B the profit

\pi

= (2.5)(12,000) - .4(60,000) = $6,000. For good C the profit

\pi

= (2.5)(8,000) - .27(60,000) = $3,800. Allocating fixed costs in proportion to output makes it appear as if good A is unprofitable even though it is making a positive contribution and should continue to be sold.

A Firm Produces Three Products A, B, and C

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