Question

d) according to the graph, if only one unit was produced, the cost per unit would be $1.00. in reality, the company would not call in its worker and start up the equipment to produce one unit. what safeguard do you think that many manufacturers use to avoid this type of problem?
e) of the following three statements, choose the best option and write a viable argument showing how it is reflected by the cost function for wichita’s factory.
the electricity contract with the utility company is structured so that higher daily energy usage is charged at a lower rate.
the plant’s production processes are performed primarily by robots that are able to work longer hours, when needed, at no additional cost.
overtime wages were required to produce at levels above 25,000 units.

Explanation:

Part d)

Manufacturers often use a minimum production quantity or batch production. Producing in batches (or setting a minimum order/production level) spreads fixed costs (like equipment setup, worker call - in) over more units, reducing the per - unit cost. For example, if they produce a batch of, say, 1000 units at once, the fixed costs of setup are divided by 1000 instead of 1, making the per - unit cost more reasonable.

To determine the best option, we analyze the cost - production relationship:

• Statement 1 implies decreasing marginal cost (unlikely for typical production).
• Statement 2 implies constant/marginal cost (not typical as production often has increasing marginal cost at higher levels).
• Statement 3: Overtime wages for production above 25,000 units means that beyond 25,000 units, the cost of producing each additional unit (marginal cost) increases. This is consistent with a cost function where, after a certain production level, the rate of cost increase (marginal cost) rises due to the higher cost of overtime labor.

Answer:

Many manufacturers use batch production (or set a minimum production quantity) to spread fixed costs (like equipment startup, worker call - in costs) over more units, reducing the per - unit cost that would be high for producing a single unit.

Part e)

First, let's analyze each statement:

1. Statement 1: Electricity contract with lower rate for higher daily energy usage

A cost function reflecting this would show decreasing marginal cost (since higher usage has lower rate). But typical cost functions for production often have increasing marginal cost (due to diminishing returns or overtime, etc.). So this is less likely.

1. Statement 2: Robots work longer hours at no additional cost

If robots can work longer at no extra cost, the marginal cost (cost of producing an additional unit) would be constant or even decreasing. But most production cost functions have a point where marginal cost increases (e.g., when human labor is needed and overtime is paid). So this is less likely.

1. Statement 3: Overtime wages above 25,000 units

When overtime is required (above a certain production level, like 25,000 units), the cost of producing each additional unit (marginal cost) increases. This is a common feature of cost functions - initially, marginal cost may be constant or decreasing, but after a point (when overtime or extra resources with higher cost are needed), marginal cost increases. So this statement is reflected in the cost function as the cost per unit (marginal cost) would rise when production exceeds 25,000 units due to overtime wages.