As noted in Problem 5 of Chapter 3, General Motors (GM) produces light trucks in its Michigan factories. Currently, its Michigan production is 50,000 trucks per month, and its marginal cost is $20,000 per truck. With regional demand given by: P = 30,000 − .1Q, GM sets a price of $25,000 per truck.
a. Confirm that setting Q = 50,000 and P = $25,000 is profit maximizing.
b. GM also assembles light trucks in a West Coast facility, which is currently manufacturing 40,000 units per month. Because it produces multiple vehicle types at this mega-plant, the firm's standard practice is to allocate $160 million of factory-wide fixed costs to light trucks. Based on this allocation, the California production manager reports that the average total cost per light truck is $22,000 per unit. Given this report, what conclusion (if any) can you draw concerning the marginal cost per truck? If West Coast demand is similar to demand in Michigan, could the West Coast factory profit by changing its output from 40,000 units?