Question

A producer sells a certain type of LED lights to LPS, a local hardware store, at $12 each. The marginal production cost for the producer is $1 per item. LPS prices the lights at $24 and expects demand to be normally distributed with a mean of 20,000 and a standard deviation of 5,000. LPS places a single order with the producer. A plan under discussion is that the producer buys back any number of unsold lights for $8 per item.

Under this plan how many items will LPS order?
What is the expected profit for LPS?
How many lights are expected to be unsold?
What is the expected under stock?
What is the expected profit for the producer?
What is the supply chain’s profit?
What should the producer do?

Answer 1

A new firm entering the market with a production of 4,000 units, alongside an incumbent firm producing 6,000 units, would increase total market supply to 10,000 units. The increased supply might lower the market price and impact the profits of both firms, requiring an estimate of the new average costs and market prices to determine precise profit figures.

Step-by-step explanation:

Based on the information provided, if a new firm with the same long-run average cost (LRAC) curve as the incumbent enters the market selling 4,000 units of output with Po being $10 and P₁ being $11, we have to estimate several outcomes. To find the new firm's average cost of producing output, we would need to reference Figure 9.2, which is not provided, but we might guess that the new firm's average cost will be higher than $10 because they do not enjoy the same economies of scale as the incumbent firm. The total output supplied to the market would then be the sum of both firm's outputs, which is 10,000 units (4,000 from the new firm plus 6,000 from the incumbent).

Assuming that the market demand remains the same, the increase in supply would likely lead to a decrease in the market price, potentially moving towards the equilibrium price. Profits for both firms would depend on the new market price and the respective costs of producing their outputs. If the market price fell below the average cost of the new entrant, they might incur losses, whereas the incumbent, due to lower costs and established position, might still be profitable but earn less profit than before.