A motorbike manufacturing firm, Kawaz, is considering expanding its factory to meet increasing demand.It rents the factory and machinery used to produce its cars and the lease on its existing factory expires in 1 month.

Kawazi current factory allows it to produce 10 bikes each day at a cost of $23,500 per bike. If it chooses to move location to a larger factory, Kawazi will double its output but have to pay additional rent on the factory equivalent to $10,000 per day.It would also have to rent more machinery which would cost an additional $200 per bike.All other costs will remain unchanged.

If it moves to the larger factory, Kawazi would have the option to upgrade all of its machinery to the latest, most efficient models; in that case it would not need to rent the $200 machinery, but its total machinery costs would be higher.Combined with the larger factory, this will allow Kawazi to triple production. It is still waiting for a quote on the additional machinery cost.

Assume that regardless of how many bikes Kawazi produces they will all be sold immediately for $25,000 and that Kawazi only makes decisions based on what will be most profitable in 1 month's time.

a) If the upgraded machinery rental costs $650 per bike more than Kawazi present machinery rental costs, what will Kawazi do?

- Stay in its existing factory

- Move to the new factory but keep existing machines

- Move to the new factory and upgrade its machines

b)If instead the company providing the upgraded machinery is negotiating with Kawazi, what is Kawazi's willingness to pay (per day) for the machinery upgrade? You may answer in per-bike terms, or as a lump sum payment for the machinery.