Review_Problem_27 - If the marginal revenue of producing...

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27.) State and explain the rule for allocating production of a good among several plants. Page 292-293 Principle: Muli-plant Output Rule Let MR(Q) be the marginal revenue of producing a total of Q = Q 1 + Q 2 units of output. Suppose the marginal cost of producing Q 1 units of output in plant 1 is MC 1 ( Q 1 ) and that of producing Q 2 units in plant 2 is MC 2 ( Q 2 ). The profit maximization rule for the two- plant monopolist is to allocate output among the two plants such that MR ( Q ) = MC 1 ( Q 1 ) MR ( Q ) = MC 2 ( Q 2 ) * * * * * * * The economic intuition underlying the multi-plant output rule is precisely the same as all of the profit maximization principles.
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Unformatted text preview: If the marginal revenue of producing output in a plant exceeds the marginal cost, the firm will add more to revenue than to cost by expanding output in the plant. If the marginal cost of producing in plant 1 is lower than that of producing in plant 2, the monopolist could reduce costs by producing more output in plant 1 and less in plant 2. As more output is produced in plant 1, the marginal cost of producing in the plant increases until it ultimately equals the marginal cost of producing in plant 2, such that MC 1 ( Q 1 ) = MC 2 ( Q 2 )...
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This note was uploaded on 05/26/2010 for the course FINA 6260 taught by Professor Fort during the Spring '10 term at University of Arkansas for Medical Sciences.

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