Consider this situation.
A factory makes blue and green widgets.
The cost of making both types of widgets is the same.
Both types of widgets sell for $5 apiece.
The factory can make 20 widgets of either color in a day.
The factory has been making 10 blue and 10 green widgets a day.
The price of blue widgets rises to $6.
Assuming that all other factors remain the same, how should the factory respond to this increase of price?
Based on the given information, the factory should respond to the increase in price of blue widgets by reallocating its production resources towards the production of blue widgets.
First, we need to determine the profit earned by the factory before and after the price increase.
Before the price increase:
The factory makes 10 blue widgets and 10 green widgets, resulting in a total revenue of (10 blue widgets * $5) + (10 green widgets * $5) = $100.
The total cost of production is the same for both types of widgets, so let's assume it's $50.
Therefore, the profit before the price increase is $100 - $50 = $50.
After the price increase:
The price of blue widgets has risen to $6. If the factory makes 10 blue widgets and 10 green widgets, it will now earn a total revenue of (10 blue widgets * $6) + (10 green widgets * $5) = $110.
The total cost of production remains the same at $50.
Therefore, the profit after the price increase is $110 - $50 = $60.
Since the profit increases after the price of blue widgets rises, the factory should respond by increasing the production of blue widgets. This will maximize the profit earned by the factory. The ideal production strategy would be to make as many blue widgets as possible to meet the increased demand and take advantage of the higher price.
1. Calculate the current daily revenue for blue and green widgets:
- Blue widgets: 10 widgets/day x $5/widget = $50/day
- Green widgets: 10 widgets/day x $5/widget = $50/day
2. Calculate the potential daily revenue for blue widgets if the price is increased to $6:
- Blue widgets: 10 widgets/day x $6/widget = $60/day
3. Calculate the potential daily revenue for green widgets if the price remains unchanged:
- Green widgets: 10 widgets/day x $5/widget = $50/day
4. Compare the current and potential daily revenues for blue and green widgets:
- Current total revenue: $50/day + $50/day = $100/day
- Potential total revenue: $60/day + $50/day = $110/day
5. As the price of blue widgets has increased, it would be beneficial for the factory to allocate more resources towards producing blue widgets.
6. The factory should adjust its production schedule to make more blue widgets and fewer green widgets. One possible adjustment could be:
- Blue widgets: Increase production to 15 widgets/day
- Green widgets: Decrease production to 5 widgets/day
7. Calculate the new daily revenue based on the adjusted production schedule:
- Blue widgets: 15 widgets/day x $6/widget = $90/day
- Green widgets: 5 widgets/day x $5/widget = $25/day
8. Calculate the total new daily revenue:
- Total revenue: $90/day + $25/day = $115/day
9. By adjusting production to make more blue widgets, the factory can increase its daily revenue from $100 to $115, taking advantage of the higher price for blue widgets.