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Consider the following information, Fixed cost ofproducing a wordprocessor: S100 million Variable cost: $1 If Y" denotes the number ofcopies ofthe computerprogramprocduced and 'X' denotes the amount spent onproduction, thenthe functional relationship betweeninput 'X' and Ύ,gives the production furction. [O, x 3100,000,000 0 g,x2100,000,000 Y = 100,000,000,x = 100,000,000 The graph below shows that the procuction finction exhibits increasingretums to scale. The line ofthe slopeis increasing as the amount invested in productionincreases. Thus, the average retum is increasingin investment
When the firm sets the price equalto the marginal cost of$1, the revenues would exactly cancel out the total cost andthe profits will be negative. The producer will bear the loss equalto the fixed cost ofproduction Thus, the producer would suffer a loss of$100 million. Suppose instead the frim charges a price equalto $20. The break-evenpoint is a situation which arises when the total revenues are equalto the total costs. TR=TC p.ą-100,000,000+1.q 20q=100.000.000+q 19q 100,000,000 Thus, the quantitvlevel that wouldneedto be soldin orderto break-evenis Ifinsteadthe price is $100, 100.q-100, 000,000+1.q 99q 100,000,000 g 1010101.01 Thus, the quantitylevelthat wouldneedto be soldin orderto break-evenis g-1010101.01
