Fixed & Marginal Costs
Do you remember those storage devices called floppy disks, or were they already obsolete by the time you were born :)? According to Encyclopaedia Brittanica, “Floppy disks were popular from the 1970s until the late 1990s, when they were supplanted by the increasing use of e-mail attachments and other means to transfer files from computer to computer.” One of the more popular brands was Memorex. We will go back in time for this question.
Memorex manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Memorex hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is C = 10 + 2Q2.
a. What are Memorex’s fixed costs?
b. What is Memorex’s marginal cost?
Now suppose other firms in the market sell the product at a price of $8.
c. How much should Memorex charge for the product?
d. What is the optimal level of output to maximize profits?
e. How much profit will be earned?
f. In the long run, should Memorex continue to operate or shut down? Why?