(d) Based on the AC function from part (c), now repeat your calculations to find the cost-minimizing arrangement of production in the case. (e) Explain intuitively the difference is results between responses to part (b) and (d). (f) Suppose now production costs are those given in part (a) but let shipping cost per router be given by t (in the preceding discussion, we had t = 6, now we assume we don’t know the cost of shipping). What value of t would make the two arrangements for production (centralized versus separate factories) equivalent in terms of cost? i.e. what value of t would make the firm indifferent between a centralized versus a dispersed set-up?
Question 2 (similar to Exercise 1.2 from textbook) The residents of cities A, B, C. D and E consume wi-fi routers, with consumption in eachcity is 150 routers (see the map below). The ﬁrm that produces routers must decide howto set-up production. It could set up ﬁve factories, dispersed across each city, with each factory producing 150 routers and supplying to its own local city market- In this case, the ﬁrm incurs no cost for shipping output. Alternatively, the ﬁrm could locate its factory atcentrally located city C, and supply routers to the entire region. The single factory in city C must then produce 750 routers, 600 of which are shipped to the cities A, B, D and Efor a shipping cost of $6 per router. A E B D (a) SUppose the average cost of producing a router is AC (0) = 150010, where Q is thenumber of routers produced in a factory. Calculate A0 with Q = 150 and Q = 750, respectively. Note and explain how this production process exhibit economies ofscale. (b) Based on the AC function from part (a), find the optimal arrangement of productionfor the firm (one central factory or ﬁve dispersed factories). The optimalarrangement minimizes total cost for the ﬁrm, where total cost is the sum of production cost and shipping cost. Clearly write down all your calculations. (c) Now suppose the average cost of producing a router is AC = 14DODI(Q+125D)- Now, repeat the calculation of AC with Q = 150 and Q = 750. I Ask a home.m-
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