Question

Naploc Inc, operates in a perfectly competitive industry. The product Naploc wants to produce has a fixed cost of $12,000 and the following total variable cost: TVC(Q) = 4 (Q-6)3 + 200 (Q+2) for Q > 3.4 Assume company can produce any amount above 3.4 units. Naploc purchased the equipment for $12,000 and did not start production yet. Market price is $400. Tebit Inc, another company that operates in the same industry desperately needs equipment and makes an offer to Naploc. Tebit already knows Naploc’s cost structure. What is the lowest price that Tebit should offer for the equipment?

Answer 1

Answer: $12,000

Explanation:

Tebit should offer the amount that Naploc has spent so far on the equipment as the minimum price. Naploc has yet to start production and so has not incurred any sort of variable costs which may degrade or add to the value of the equipment.

The only cost to Naploc so far therefore as a result of the equipment is the $12,000 that has been spent on it already and this is the only relevant amount at that moment therefore it is the minimum that should be offered to entice Naploc to part with it.