12.1 Beef Products Inc. (BPI) is a beef processing firm with production facilities in a few locations
Question:
12.1 Beef Products Inc. (BPI) is a beef processing firm with production facilities in a few locations around the United States. These production facilities produce a type of ground beef additive known as lean, finely-textured beef
(LFTB). BPI has production facilities in South Sioux City, NE and Holcomb, KS. The plant in Nebraska is larger and can take advantage of economies of scale; however, the plant in Kansas is in an area with a lower cost of living and can pay lower wages. This makes the costs of production of LFTB different between the two plants.
Suppose a firm like BPI is deciding how much LFTB to produce on each line at each of two plants monthly. The larger plant has fixed costs of $20,000 while the smaller plant’s fixed costs are $10,000. The larger plant is in an area with higher costs of living and must pay each of its line employees $3,000 per month while the smaller plant is in an area with a lower cost of living and pays its line employees
$2,500 per month. The cost of materials used as inputs are the same for both plants, $0.50 per pound.
Use the above information to complete the following tasks and answer the following questions.
a. Using the template provided, fill in the information given for fixed costs.
b. Using the information given, find the cost of materials inputs and total cost at each level of production. Keep in mind, production is in thousands of units.
c. Using the production information given and the total costs you found in part b, find the marginal cost of each pound of LFTB.
d. If ground beef producers are willing to pay $1.50 per pound of LFTB, how much will each plant produce and how much will be produced in total?
e. Suppose demand for LFTB fell, bringing the price to $1 per pound. How much would each plant produce and how much would be produced in total? What kind of market changes might cause demand to fall?
Step by Step Answer:
