Blog #3

Part 1:

            Shoe Chip is a fictional company that just developed a product in the wearable technology department. This product is a chip that measures the way someone steps and recommends a specific type of shoe that fits their step. The product will cost 125 dollars and the cost of producing one of them is only 40 dollars. The company is attracting many costumers who want to get the right fit in their product.

Part 2:

• ·      Total Fixed Cost: 550,000$
•             -Building (Offices and Factory): 500,000$
•             -Equipment: 40,000$
•            -Utilities 10,000$
• ·      Variable Cost: Cost of producing on more chip 40$
• ·      R(q)= 125(q)
• ·      Cost Function: 550,000 + 40q
• ·      Revenue Function: 125q
• ·      Profit Function: P (q)= 125(q) – 40(q)
• ·      Break Even 0 = 125q - (550,000 + 40q)= 6470.58= 6471 chips.

• ·      The company needs to sell 6471 products to break even and from there the profit starts being generated in

·      After a certain point the graph will start generating profit.

     Part Three:

·      8000 products will be produced every day so q= 8000

·      Marginal Cost = C’(q)

    C(q)= 550,000 + 40q

    C’(q) = 40

·      AC: (550,000 + 40q)/8000= 108.75$ is the average cost of producing 8000 units.

    Questions for Part 3:

1.    Is the Marginal revenue less than or greater than the marginal cost at q=n? My marginal revue is greater than my marginal cost (125>40) because the revue needs to surpass the cost in order for the company to produce money.

2.    Is the number of units sold daily (q=n) after or before the break-even point? What does this mean? By looking at my graph I picked the number to be 8000 chips produced a day, which is higher than the break even because I need 6471 to break even and I am producing 8000 per day meaning that I am well above my break-even point, which is a gain for the company.

3.    If production is increased by one extra quantity per day (i.e. if q = n + 1)) will the company continue to make money? Explain. (be sure to reference the formulas R(q + 1) – R(q) and C(q + 1) – C(q) in your explanation)

   125(Q+1)- 125(Q) and 550,000 + 40(Q + 1) - 550,000 + 40(Q)= 125>40 therefore if I increase the quantity by one my revenue will still be higher than my cost. The more I produce the more money I receive.

4. At q = n, does an increase of production increase or decrease the average cost for the company?  If the production increases it would decrease the average cost for the company for producing one product.

5. Explain whether increasing or decreasing average costs would be better for the company.

Decreasing the average cost is better for the company because it will create higher profit for each product produced.

    Part Four:

    The company will likely thrive in the next five years due to the great production and sales it will face. They produce more than 8000 chips a day meaning that is well above the break-even point in quantity, which was 6471. By exceeding the break even point the company will have an exponential growth in money. It is true that at first the company will have to wait in order to break even, but once the fixed cost have been passed then from there it is all gain. If we follow the product diffusion curve, however the product is bound to hit a point where the technology is old, and will no longer cause an impact, but by the time this happens it will have enough money to move to the next big thing. The company will thrive in the following years.