Firm XYZ: Allocating Production for Widgets at Equal Average Costs

[MM79992]

1. Homework Statement [/b
Firm XYZ produces widgets using two plants. True or False: "It should allocate its production between the plants so that the average cost of a widget is the same in the two plants."

Homework Equations

The Attempt at a Solution

Ive looked at different cost graphs and theories, I've looked up allocation and found one theory that allocating helps produce the most favorable outcome. But I need help with good reasoning to explain why its true or false.
If anyone would like to help on this I would appreciate it thank you.

 

[Nino MMP]

False. The cost of a widget may be the same in two plants, but it is not necessary to allocate production between the plants in order to achieve this. Allocation of production between the plants can help to minimize overall production costs, but it is not necessary to achieve the same average cost of a widget in each plant.

 

[Blueshift5]

I can provide a response to this statement based on economic principles. The statement is true, and here's why:

First, let's define average cost. Average cost is the total cost of producing a certain number of units divided by the number of units produced. This gives us the average cost per unit.

In the context of Firm XYZ, having equal average costs in both plants means that the cost of producing one widget in Plant A is the same as the cost of producing one widget in Plant B.

Now, let's consider the concept of economies of scale. This refers to the cost advantages that a firm experiences as it increases its level of production. In other words, the more units a firm produces, the lower the average cost per unit.

If Firm XYZ allocates its production between the two plants so that the average cost is the same, it is essentially maximizing its economies of scale. This means that the firm is producing the same number of units, but at a lower cost.

On the other hand, if the firm were to allocate production in a way that results in different average costs between the two plants, it would not be maximizing its economies of scale. This could lead to inefficiencies and higher costs for the firm.

Therefore, it is true that Firm XYZ should allocate its production between the plants so that the average cost of a widget is the same in both plants. This will help the firm achieve the most favorable outcome in terms of cost efficiency and profitability.