A firm produces digital watches on a single production line serviced during one daily shift; The total output of watches depends directly on the # of labor hrs employed on the line. Max capacity = 120k watches per month: this output requires 60k hrs of labor per month. Total fixed cost =600k per month, wage rate =$8 per hr and variable costs avg $6 per watch. The marketing estimate of demand is P=28-Q/20000 where P denote price in s and Q is monthly demand.
How many additional watches can be produced by an extra hr of labor? What is MC of any additional watch? As a profit maximizer what price and output should the firm set? Is production capacity fully utilized? What contribution does this product line provide?
The firm can increase capacity to 100% by scheduling a night shift. The wage rate = $12 per hr. Answer questions in part A in light of new option
Suppose demand for the firm's watches fall permanently to P=20-Q/20000. With the fall of demand, what output should the firm produce in the short run, in the long run? Explain.