A firm produces digital watches on a single production line serviced during one daily shift. The total output of watches depends directly on the number of labor-hours employed on the line. Maximum capacity of the line is 120,000 watches per month; this output requires 60,000 hours of labor per month. Total fixed costs come to $600,000 per month, the wage rate averages $8 per hour; and other variable cost (e.g., materials) average $6 per watch. The marketing department’s estimate of demand is P=28-Q / 20,000, where P denotes price in dollars and Q is monthly demand.
A. How many additional watches can be produced by an extra hour of labor? What is the marginal cost of an additional watch? As a profit maximize, what price and output should the firm set? Is production capacity fully utilized? What contribution does this product line provide?
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