(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 316

CHAPTER 8 • Profit Maximization and Competitive Supply 291

Cost
(dollars per ton)

MC

1400
P2
1300
P1
1200
1140
1100

0

300

600

900
Output (tons per day)

F IGURE 8.5

THE SHORT-RUN OUTPUT OF AN ALUMINUM SMELTING PLANT
In the short run, the plant should produce 600 tons per day if price is above
$1140 per ton but less than $1300 per ton. If price is greater than $1300 per
ton, it should run an overtime shift and produce 900 tons per day. If price drops
below $1140 per ton, the firm should stop producing, but it should probably

stay in business because the price may rise in the future.

EX AMPLE 8. 3 SOME COST CONSIDERATIONS FOR MANAGERS
The application of the rule that marginal revenue
should equal marginal cost depends on a manager’s ability to estimate marginal cost.3 To obtain
useful measures of cost, managers should keep
three guidelines in mind.
First, except under limited circumstances, average variable cost should not be used as a substitute

for marginal cost. When marginal and average variable cost are nearly constant, there is little difference
between them. However, if both marginal and average cost are increasing sharply, the use of average
variable cost can be misleading in deciding how much
to produce. Suppose for example, that a company
has the following cost information:

Current output

100 units per day, 80 of which are produced during the regular shift and
20 of which are produced during overtime

Materials cost

$8 per unit for all output

Labor cost

$30 per unit for the regular shift; $50 per unit for the overtime shift

3
This example draws on the discussion of costs and managerial decision making in Thomas Nagle and

Reed Holden, The Strategy and Tactics of Pricing, 5th ed. (Upper Saddle River, NJ: Prentice Hall, 2010), ch. 2.