Suppose a firm producing table lamps has the following costs:
Quantity Average Total Cost
1,000..............................................$15.00
2,000.................................................9.75
3,000.................................................8.25
4,000.................................................7.50
5,000.................................................7.75
6,000.................................................8.50
7,000.................................................9.75
8,000................................................10.50
9,000................................................12.00
Ben and Jerry are managers at the company, and they have this discussion:
Ben: We should produce 4,000 lamps per month because that will minimize our average cost.
Jerry: But shouldn't we maximize profit rather than minimize cost? To maximize profit, don't we need to take demand into account?
Ben: Don't worry. By minimizing average cost, we will be maximizing profit. Demand will determine how high the price we can charge will be, but it won't affect our profit maximizing quantity.
Evaluate the discussion between the two managers.