Question

A firm practices a chase strategy. Production last quarter was 1000. Demand over the next four quarters is estimated to be 900, 700, 1000, and 1000. Hiring cost is $20 per unit, and layoff cost is $5 per unit. Over the next year, what will be the sum of hiring and layoff costs

Answer 1

Answer:

$7,500

Explanation:

last quarter production was 1,000

production for the next four quarters:

1. 900 ⇒ so 100 will be fired = 100 x $5 = $500 firing costs
2. 700 ⇒ so 200 will be fired = 200 x $5 = $1,000 firing costs
3. 1,000 ⇒ 300 will be hired = 300 x $20 = $6,000 hiring costs
4. 1,000 ⇒ no one will be fired or hired

total firing and hiring costs = $500 + $1,000 + $6,000 = $7,500

When a firm pursues a chase strategy, it means that they are following the quantity demanded which is set by the market. They only follow the demand, they do not attempt to increase or decrease it.