Asked by Katherine Erickson on May 31, 2024
Verified
In the reclining chair industry (which is perfectly competitive) , two different technologies of production exist.These technologies exhibit the following total cost functions: C1(Q) 500 560Q 40Q2 Q3
C2(Q) 600 280Q 20Q2 Q3
Due to foreign competition, the market price of reclining chairs has fallen to $170.In the short run, firms using technology 1
A) and firms using technology 2 will remain in business.
B) will remain in business and firms using technology 2 will shut down.
C) will shut down and firms using technology 2 will remain in business.
D) and firms using technology 2 will shut down.
E) More information is needed to make a judgment.
Total Cost Functions
Mathematical representations that describe how the total cost of production changes as the output level varies.
Market Price
The existing rate at which an asset or service can be acquired or disposed of in a trading environment.
Technology
The application of scientific knowledge for practical purposes, especially in industry, which drives innovation, efficiency, and the development of new products and processes.
- Determine the circumstances that lead a firm to decide on production or cessation in the short term by analyzing cost and price data.
- Comprehend the significance of selecting appropriate technology in enhancing a company's competitive edge in the marketplace.
Verified Answer
HT
Haley ThompsonJun 05, 2024
Final Answer :
B
Explanation :
In the short run, firms will shut down if the price is below the average variable cost (AVC). The given cost functions are complex, but the decision to shut down depends on comparing the market price ($170) to the AVC of each technology. Without explicit AVC calculations, we infer that technology differences and the lower fixed cost of technology 1 might allow it to have a lower AVC than technology 2 at a price of $170, leading to the conclusion that firms using technology 1 will remain in business while those using technology 2 will shut down.
Learning Objectives
- Determine the circumstances that lead a firm to decide on production or cessation in the short term by analyzing cost and price data.
- Comprehend the significance of selecting appropriate technology in enhancing a company's competitive edge in the marketplace.