Question

A firm has three different production​ facilities, all of which produce the same product. While reviewing the​ firm's cost​ data, Jasmin, a​ manager, discovers that one of the plants has a higher average cost than the other plants and suggests closing that plant. Another​ manager, Joshua, notes that the​ high-cost plant has high fixed costs but that the marginal cost for that plant is lower than in the other plants. He says that the​ high-cost plant should not be shut down but should expand its operations. Who is​ right? Just considering the short run time​ frame, the manager who is correct is

Answer 1

Joshua statement is correct.

Step-by-step explanation:

Marginal cost:

Is the cost of producing a new unit.

Average Cost:

`(Fixed Cost + Variable Cost)/(UnitsProduced) = $Average Cost`

`(Fixed Cost)/(UnitsProduced) + $Variable Cost Per Unit= Average Cost`

If the marginal cost of this plant is lower than their other plants, it can decrease his average cost by increasing the amount produced.

This increase in production decrease the impact of the fixed cost in the unit price. At more production the average cost will decrease. Because the variable cost keeps at the same value but the fixed cost per unit decrease.