# ps2 - AEM 424 Problem Set#2 1 Hugo(econ review Your boss...

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AEM 424 Problem Set #2 1. Hugo (econ review) Your boss Hugo has just leased a new nut-grinding machine that has the capacity to produce 100 units of hugonuts per day. The daily lease cost is \$405. The market price for a unit of hugonuts is \$120, and no one expects this to change in the foreseeable future. When running the machine, you observe that daily total costs follow the pattern: TC=405+20Q+5Q 2 , where Q is the number of hugonuts produced and TC is in \$. a) Hugo has decided to minimize his total costs. How much should he produce? What are his total profits? b) Hugo is back in the shop. He understands the importance of amortizing the daily lease cost of the machine over a large production run. His brother-in-law the VP of marketing has convinced Hugo of the importance of dominating the market and getting as much market share as he can with his existing machine. Hugo decides to follow this friendly advice, believing that not only will he make great heaps of money but he will also achieve much more pleasant conditions at the next gathering with his in-laws. How much does he instruct you to produce in order to maximize sales? What are his total profits? c) You notice Hugo has sprouted a few more gray hairs. Coincidentally, the marketing VP was called away to investigate a potential new client in Tierra del Fuego. Hugo has given the matter more thought, and instructs you to minimize the average cost of production. How much do you produce? What are your profits? d) Hugo is looking a bit better. He almost smiles now, especially when he shows everyone those spectacular post-cards of the fog and ice his brother-in-law keeps sending from Tierra del Fuego. You spot your opportunity and recommend that the time has come to

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ps2 - AEM 424 Problem Set#2 1 Hugo(econ review Your boss...

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