Microeconomics 6th Edition by Robert Hall, Shirley Kuiper, Marc Lieberman

Exercise 4

Ludmilla's House of Schnitzel is currently producing 10 schnitzels a day at point A on the following diagram. Ludmilla's business partner,Hans (an impatient sort),wants her to double production immediately.

a. What point will likely illustrate Ludmilla's cost situation for the near future? Why?
b. If Ludmilla wants to keep producing 20 schnitzels,at what point does she want to be eventually? How can she get there?
c. Eventually,Ludmilla and company do very well,expanding until they find themselves making 70 schnitzels a day. But after a few years,Ludmilla discovers that profit was greater when she produced 20 schnitzels per day. She wants to scale back production to 20 schnitzels per day,laying off workers,selling off equipment,renting less space,and producing fewer schnitzels. Hans wants to reduce output by just cutting back on flour and milk and laying off workers. Who's right? Discuss the situation with reference to the relevant points on the diagram.
d. Does the figure tell us what output Ludmilla should aim for? Why or why not?