Marginal Analysis

Your company is producing and selling three products, Alpha, Beta and Gamma. The three products independent with regard to consumption (that is, they are neither substitutes nor complements). The price, quantity sold and unit variable cost (also known as average variable cost) for each product is listed below.

Alpha Beta Gamma Price (per unit) $25 $30 $30 Quantity Sold (Q) 400 200 100 Unit Variable Cost (AVC) $26 $27 $29

(a) Assuming that the company has a fixed overhead cost of $1200 that must be borne if any of the three products is produced, should the firm "stay in business" or "go out of business"? I would "Stay in" or "Go out" (circle one, here and on answer sheet).

(b) If you answer to (a) was "stay in business", then how high would the fixed overhead have to be in order for the firm to "go out of business? Likewise, if your answer to (a) was "go out of business", then how low would the fixed overhead have to be in order for the firm to "stay in business"?

Fixed Overhead would need to be = $

(c) Now, assume that products Beta and Gamma are produced using the same facilities so that only one of these two product lines can be produced (in addition to Alpha). If the fixed overhead remains $1200, which one (if either or neither) would you produce? Explain your answer. If the fixed overhead was lowered to $600, which (if either) one would you produce? At a fixed overhead of $1200, I would produce (i) Alpha & Beta or (ii) Alpha & Gamma or (iii) nothing at all. At a fixed overhead of $600, I would produce (i) Alpha & Beta or (ii) Alpha & Gamma or (iii) nothing at all.