Question

b. Suppose that for each 25,000-bottle-per-day increase in production above 100,000 bottles per day, TC increases by $5,000 (so that, for instance, 125,000 bottles per day would generate total costs of $130,000 and 150,000 bottles per day would generate total costs of $135,000). Is this a decreasing-cost industry?

Answer 1

Answer:

The answer is: Yes, it's a decreasing cost industry.

Explanation:

Currently the total cost per unit is:

• $130,000 / 125,000 bottles = $1.04 per bottle

If the total costs increase by $5,000 for every 25,000 extra bottles produced, then the total cost per unit is:

• $135,000 / 150,000 bottles = $0.90 per bottle

If the bottle production keeps increasing to 175,000 bottles, the total costs will only increase by $5,000. So the total cost per unit is:

• $140,000 / 175,000 bottles = $0.80 per bottle

So as the production level increases, the cost per unit decreases.