A firm produces digital watches on a single production line serviced during one daily shift.  The total output of watches depends directly on the number of labour hours employed on the line.  Maximum capacity of the line is 120,000 watches per month: this output requires 60,000 hours of labour per month.  Total fixed costs come to $600,000 per month, the wage rate averages $8 per hour, and the other variable costs are $6 per watch.  The marketing departments estimate of demand is P = 28 - Q/20,000, where P denotes the price in dollars and Q is monthly demand.

a) How many additional watches can be produced by an extra hour of labour?  What is the marginal cost of an 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?

b) The firm up to 100% by scheduling a night shift.  The wage rate at night averages $12 per hour.  Answer the questions in part A in light of this additional option.

c) Suppose demand for the firms watches falls permanently to P = 20 - Q/20,000.  In view of this fall in demand, what output should the firm produce in the short run?  In the long run? Explain.