Economics Analysis for Management Decision—Homework2

M1212092 吴吟龙 1121209316

Course Name: Economics Analysis for Management Decision

Instructor: ___ Genyuan ZHONG _______

Class: _______ M1212092________

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Student ID___1121209316__ Student Name____吴吟龙_____

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Antai College of Economics and Management Shanghai Jiaotong University Department of Economics

Genyuan ZHONG

HOMEWORK SET #2

Your completed homework is due in class or may be placed in Zhonggenyuan’s box for your section, which will be located in Antai Bvld floor 2, before 5:30 p.m. Late homework sets will not be corrected and receive partial credit, if any.

1.You are the advisor of Unity Car, a company that provides partially assembled automobile

components to Packard, a major automobile manufacturer. They have just received a rush

order from Packard, offering to pay $160 per unit for the first 500 units, and $120 per unit

thereafter.

What would be your recommendations to the company? Remember to explain how many units Unity Car should produce (assuming that you can only produce a multiple of 100 and that the rush order is Unity Car’s only production) and at what profits/loss. In your answer, comment on each of the statements using your knowledge of the firm’s cost schedules.

Accept the offer and produce 600 units for

-It is a short term decision, we should accept the order whenever the Price is over AVC

-When the MC = price, the quantity we produce could make us the most profit. Since Unity Car can only produce in multiples of 100, we have to pick up a production quantity

so that the MC is near but below the price, where the quantity turns out to be 600.

-The calculation of MC, AVC could be found in the table below, where

o AVC = Variable Cost / Units

o MC = (Variable Cost[n] - Variable Cost[n-1]) / (Units [n] - Units [n-1])

About the argument

-Unity Car should turn the order down because Packard is not paying enough

For 500 units the unit price Packard offered is over AVC so the order should be taken.

-Producing 500 units, the average costs would be lower than the pricing offered by Packard, but this wouldn’t be true at 600 units. Therefore, Unity Car should agree to

produce 500 units.