Firms faces the demand curve P=380-5q, has a constant marginal cost of production of 40 up to its capacity level, has no fixed costs, and cannot produce beyond capacity.
Assume initially that DELL has 30 units of capacity.
i) What is the firm’s choice of price and quantity?
ii) Now suppose that the firm can lease for one period additional units of capacity at a cost of 10 per unit of capacity. How much additional capacity, if any, does the firm lease and what is the firm’s choice of price and quantity?
Starting from the situation analyzed in ii) above, suppose that instead of being able to lease additional capacity, the firm has the option of selling capacity. In particular, ABC has a factory on the adjacent plot of land and is looking to expand its operations (assume that original firm and ABC are in different lines of business).
iii) Suppose that ABC makes an offer to original firm such that original could either sell the whole factory for 3000, or it could sell any fraction of the plant at a cost of 100 per unit of capacity (assume this is a one period problem). How many units of capacity does firm sell and what price and quantity does it set for the output market? Show work.iv) Same question as in iii), but now assume that the firm pays to the government an avoidable lump sum tax of 2500 if it produces a positive amount (the tax equals zero if the firm produces zero). Show work and explain your reasoning.