Max Whitley, Manager of Whitley Construction, Builds New Homes in a Booming

Essay

Max Whitley, manager of Whitley Construction, builds new homes in a booming community in the Midwest. Although sales have slowed because of a national recession, it now looks as if the recession is about to end. Max wants to be ready with material, labor, and foremen to meet the demand for housing. Last year, Max built and sold 40 starter homes which is the most popular model. Max thinks that his sales will increase to 50 units over the current year. The going market price for this model (which Max and his numerous competitors have charged) has been $275,000. In addition, Whitley Construction's marginal cost of building this model averages $245,000.
(a) Based on these facts, recommend a course of action for Max.
(b) Suppose that the economic boom raises the cost of labor and raw materials, so that the additional cost of a starter house rises to $265,000. What is Max's most profitable course of action? Explain.