how+to+maximize+profit+when+there+are+two+production+plants

In order to maximize profit where there are two production plants, firms need to look at the same profit maximization principles as the single-plant firm. That is, they should produce up to the point where marginal revenue is equal to marginal cost. If the revenue exceeds the marginal cost, then the firm should add more to revenue by expanding their output. If their costs are above their revenue, they should lower production until MC equalsMR. With two (or more) firms, the business has the benefit of being able to transition output from one plant to another. In each plant, they should produce to the point where MR (total) MC(plant1) x Quantity (plant1) and MR (Total) MC (Plant 2) x Quantity (plant 2). Basically, multiplant firms (if there is a fixed total output) should shift production to the plant with the lowest marginal costs, up to the point where MC plant 1 MC plant x.

Real World Example: When making resource allocation decisions, including decisions to maximize profit by shutting down a plant, firms should also realize that there can (and will) be social implications as well. One example of this is GM's decision to transfer shipping dies from one plant in Flint Michigan to another in Mansfield, Ohio. The decision made perfect economic sense for GM. The plant in Mansfield had lower marginal costs on this particular part of their business, so they transferred production away from the flint plant. Unfortunately, this also led to a transfer in Labor away from flint. This did not sit well with the union and it led to a UAW strike that had a significant financial impact on GM and its workers. This example underscores the importance of taking into account all economic costs of multi-plant decisions, as opposed to just isolated accounting costs of that particualr portion of the business. http://eatthestate.org/02-45/GeneralStrike.htm

Test question: A firm produces output at two production plants. If facility A has a lower marginal cost of production than plant B, the firm should take which of the following actions to maximize profits?

A) Do nothing as long as MCa(Qa) + MCb(Qb) < MR(Qa + Qb) B) Produce at 100% capacity in plant "a" with remaining production in plant "b" C) Reallocate production until MCa(Qa) = MCb(Qb) D) none of the above

Answer: C The multiplant output rule states the following: The marginal revenue of 2 plants is represented by MR(Q) and the total production is Q = Qa + Qb for the firm. The firm will maximize profits by reallocating production until MR(Q) MCa(Qa) and MR(Q) MCb(Qb)

Consider a firm with the following inverse demand function: P(q) = 150 - Q

The firm operates two plants. Plant One has a marginal cost 4Q1. Plant 2 has a marginal cost Q2. How should this firm allocated production A. Produce the same in Plant 1 as Plant 2 B. Produce More in Plant 1 than plant 2 C. Produce More in Plant 2 than Plant 1 D. Not enough information provided Answer: C The firm has a lower marginal cost of production in plant 2, so it should distribute its production in such a way that MC1(Q1) = MC2(Q2) Because MC2 < MC1, this means that Q2 should be greater than Q1 in order for this equation to balance out. The firm should shift production to Plant two.