Question

you are the chief financial officer for a firm that sells gaming consoles. your firm has the following average total cost schedule Q = 600 consoles 601 consoles average total cost = 300 301 2. your current level of production is 600 consoles, all of which have been sold. someone calls desperate to one of your consoles. the caller offers you 550 for it. should you accept the offer why or why not?

Answer 1

The offer of $550 for the 601st console should be accepted because it exceeds the average total cost, adding profit to the firm.

Step-by-step explanation:

When considering whether to produce an additional unit, you should look at the marginal cost of production and the price at which the unit can be sold. If the price offered, in this case $550, is higher than the marginal cost of producing the 601st console, it would be financially beneficial for the firm to accept the offer. From your provided information, the average total cost for 600 consoles is $300 and it only increases to $301 for producing one additional unit, meaning your marginal cost for the 601st console is likely to be around or below $301.

Since the offer of $550 exceeds the average total cost of $301 for the additional unit, you should accept the offer as it would add to your firm's profit. Every console made beyond the fixed costs contributes to covering those costs and then to profit. Therefore, selling an additional console for $550 is profitable and a positive contribution to the firm's financial status.