mbeya cement company which has arising short run Marginal cost Curve is currently operating at loss .Mbeya cement company 's chief Economist says that if price rises a little the output should not be increased because,If the Marginal cost would rise and the company would end up with bigger loss on higher volume. Should the Chief executive of Mbeya cement company listen to the Chief Economists..Why and why not .Give the. Answer with the illustration of diagrams.
Well, the Chief Economist certainly has a point, but let's not forget that business decisions should not be based solely on marginal cost curves or economic theories. As Clown Bot, I can give you a lighthearted analysis to help you understand the situation.
You see, if the Chief Economist's advice is followed, the company might end up like a juggler who tries to juggle too many balls at once. In this case, the balls represent units of output, and the juggler represents the company. Now, if the price rises just a little and the company increases its output, the juggler would have to throw more balls into the air. But here's the catch: the Marginal Cost curve is rising.
Imagine the Marginal Cost curve as a plate that the juggler is holding. As more balls are added, the plate becomes heavier, making it difficult for the juggler to balance. This represents the increasing costs faced by the company when it produces more.
Now, if the company continues to increase output, the juggler might lose balance and end up dropping some balls. Similarly, the company might experience bigger losses if the Marginal Cost curve keeps rising with higher volumes.
So, whether the Chief Executive should listen to the Chief Economist depends on various factors, such as demand, market conditions, and the company's financial situation. It's vital for them to consider the overall profitability and sustainability of the business before making any decisions.
Remember, economics is a complex subject, and it's always important to consider multiple perspectives and take into account all relevant factors.
In order to determine whether the Chief Executive of Mbeya cement company should listen to the Chief Economist's advice, we need to analyze the relationship between price, output, and the marginal cost curve.
First, let's understand the concept of the marginal cost curve. The marginal cost curve shows the additional cost incurred by producing one more unit of output. Typically, marginal costs increase as output increases due to factors such as diminishing returns or the need for additional resources.
In the given scenario, if Mbeya cement company is currently operating at a loss, it implies that its total cost of production is higher than its total revenue. Therefore, the company's existing price is lower than its average variable cost (AVC). Let's assume the initial situation is represented by the following diagram:
Price
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_______
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AVC |
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_______
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MC |
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_______
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|______________________ Quantity
The graph shows three curves: price, average variable cost (AVC), and marginal cost (MC), against quantity. The AVC curve indicates the level of cost per unit of output. The MC curve represents the additional cost of producing one more unit. The price curve represents the existing price at which the company is selling its output.
Now, the Chief Economist advises against increasing output even if the price rises slightly. The reasoning behind this advice could be that if the marginal cost were to rise as output increases, the company would end up with a bigger loss on higher volume. This implies that the marginal cost curve is upward sloping in the short run.
If the Chief Economist's advice is followed, the company would maintain its current level of output despite the price increase. The diagram below illustrates the initial situation and the Chief Economist's suggested course of action:
Price
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AVC | Capacity Constrained
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MC |
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_______
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|______________________ Quantity
In this diagram, the MC curve is shown as a flat line, indicating that the company's marginal cost would remain constant at the current level of output despite the price increase.
Now, let's analyze whether the Chief Executive should listen to the Chief Economist's advice. The decision should be based on a comparison of the company's current situation and potential outcomes.
Listening to the Chief Economist's advice would mean the company maintains its current output level, effectively operating at a loss but avoiding the potential of incurring even higher losses on increased volume.
Not following the Chief Economist's advice and increasing output in response to a price increase would result in a higher level of loss on higher volume. This can be represented in the following diagram:
Price
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_______
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AVC |
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_______
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MC |
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_______
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|___ New Output Level__________ Quantity
In this diagram, the MC curve is upward sloping, indicating that the marginal cost increases as output increases. The new output level is higher than the initial level, but the company would still operate at a loss due to the increased costs.
In conclusion, based on the given information and the diagrams, it seems reasonable for the Chief Executive to listen to the Chief Economist's advice. Maintaining the current output level despite a price increase would minimize the company's losses.
The Chief Economist of Mbeya cement company advises against increasing output even if the price rises because doing so would cause the marginal cost to rise and result in a bigger loss on a higher volume. To determine whether the Chief Executive should listen to the Chief Economist's advice, we can analyze the situation using diagrams.
Firstly, let's understand the concept of the short run marginal cost curve. The marginal cost (MC) curve represents the additional cost of producing one more unit of output. In the short run, some costs such as labor and raw materials may be fixed, while others may vary with output. As a result, the MC curve tends to be U-shaped, indicating increasing marginal costs at low levels of output, reaching a minimum point, and then increasing again as output expands.
In this case, let's assume the company is currently operating at a loss. This means that the average revenue (AR) or price per unit is lower than the average cost (AC) of production. Therefore, the company's profit is negative, and increasing output would result in even greater losses.
To illustrate this, we can refer to the diagram below:
```
MC
^
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| \
| \
| \
| \
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| \
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AC ----| \
| \
| \
| \
| \
-------------------------
Q
```
In the diagram, MC represents the rising marginal cost curve, and AC represents the average cost curve. The point at which AC intersects MC denotes the optimal level of output (Q). At this level, AC is at its minimum, indicating efficiency in production.
Now, suppose the company considers increasing the price of its cement. If we draw a new demand curve (D1) for the cement following a price increase, it would intersect the original demand curve (D) at a higher price level. However, since the company is operating at a loss, the new price is still lower than the average cost.
```
P1
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D1 |
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D |------------------------
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AC
```
In the diagram, P1 represents the new price after the increase, and D1 represents the new demand curve. As we can see, even with the price increase, the AC curve is still higher than the new price level. Therefore, increasing output at this stage would result in an even higher marginal cost (MC1) and a bigger loss for the company.
Based on this analysis, it is advisable for the Chief Executive to listen to the Chief Economist's advice. Increasing output when the company is already operating at a loss would only lead to higher costs and a greater loss. It would be more prudent for the company to focus on reducing costs or improving efficiency before considering expanding production.