Problem 3: (a two-marginal-costs-and-one-marginal-revenue problem) SleazeCo also manufacturers wind turbines (that produce electricity) for sale in Texas. They currently have one manufacturing facility in Dallas, Texas, that has the following total cost curve: TCD = 10,000,000 + 150,000*40 + 25(90), where qo is the number of turbines produced per year in Dallas and TCD is the total cost in dollars. While these turbines are fairly standard in design, the SleazeCo brand is well-regarded and has some market power. In fact, the demand and marginal revenue curves for SleazeCo is given by Demand: P = $350,000-5q, Marginal Revenue: MR = $350,000 - 10q, where q is the total amount SleazeCo sells, P is the price in dollars) and MR is the marginal revenue (in dollars). Questions: 1. What is the profit maximizing price SleazeCo's should set for its turbines? 2. What is its profit at this price? (6 points) 3. Gus Ty, the manager of SleazeCo's turbine business, has done some analysis and has found a facility in Houston, Texas, that, after some alterations, could also be used for manufacturing. Its total cost is given by TCH = 12,000,000 + 140,000H + 20(9H), where Ch is the number of units produced at this plant and TCH is the total cost in dollars. Should Gus build the second facility? Why? Justify your answer with relevant numbers and analysis. Note: a suitable and complete answer will show whether the profits of the SleazeCo turbine business increase or decrease with the new plant if Gus operates both plants optimally. Hint: If Gus is going to produce optimally at both plants, what must be true about the marginal cost at one versus the other? That is, consider the value of adding a new plant if, given that plant, the firm is optimally producing at both plants. Problem 3: (a two-marginal-costs-and-one-marginal-revenue problem) SleazeCo also manufacturers wind turbines (that produce electricity) for sale in Texas. They currently have one manufacturing facility in Dallas, Texas, that has the following total cost curve: TCD = 10,000,000 + 150,000*40 + 25(90), where qo is the number of turbines produced per year in Dallas and TCD is the total cost in dollars. While these turbines are fairly standard in design, the SleazeCo brand is well-regarded and has some market power. In fact, the demand and marginal revenue curves for SleazeCo is given by Demand: P = $350,000-5q, Marginal Revenue: MR = $350,000 - 10q, where q is the total amount SleazeCo sells, P is the price in dollars) and MR is the marginal revenue (in dollars). Questions: 1. What is the profit maximizing price SleazeCo's should set for its turbines? 2. What is its profit at this price? (6 points) 3. Gus Ty, the manager of SleazeCo's turbine business, has done some analysis and has found a facility in Houston, Texas, that, after some alterations, could also be used for manufacturing. Its total cost is given by TCH = 12,000,000 + 140,000H + 20(9H), where Ch is the number of units produced at this plant and TCH is the total cost in dollars. Should Gus build the second facility? Why? Justify your answer with relevant numbers and analysis. Note: a suitable and complete answer will show whether the profits of the SleazeCo turbine business increase or decrease with the new plant if Gus operates both plants optimally. Hint: If Gus is going to produce optimally at both plants, what must be true about the marginal cost at one versus the other? That is, consider the value of adding a new plant if, given that plant, the firm is optimally producing at both plants
