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You are the chief financial officer for a firm that sells digital music players. Your firm has the following average-total-cost schedule:

$\begin{array}{lc} \text{ Quantity } & \text{ Average Total Cost } \\ \hline 600 \text{ players } & \$ 300 \\ 601 & 301 \end{array}$

Your current level of production is $600$ devices, all of which have been sold. Someone calls, desperate to buy one of your music players. The caller offers you $\$ 550$ for it. Should you accept the offer? Why or why not?

Solutions

VerifiedThe formula for average total cost is:

$ATC=TC\div Q$

Rearrange the formula to determine the total cost when 600 players are sold:

$TC=ATC\cdot Q$

$TC=300\cdot 600=180,000$

Total cost for 601 players:

$TC=301\cdot601=180,901$

In this problem, we have to determine whether the firm should produce an additional unit of output or not.

The total cost of production of 600 players is 180000 dollars and of 601 players is 180901 dollars. So the extra cost of production of 1 music player is 901 dollars. I should not accept the offer of 550 dollars for that one music player.

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