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Chapter 6: Problem 7

A producer makes 100 units of good \(X\) at 40 dollars each. Under no circumstances will he sell the good for less than \(\$ 40\). Do you agree or disagree? Explain your answer.

Short Answer

Expert verified
Based on the given information, one might agree with the producer's decision not to sell below $40 per unit. Given that $40 is the cost price, selling below this price would result in a loss per unit sold, barring any other external factors not explained in the problem context.

Step by step solution

01

Understanding Production cost

The producer makes 100 units of Good X. Each unit costs him $40. That implies the total cost of production is \(100 units * $40/unit = $4000\). This is the amount he needs to recover to break even.
02

Price Setting

The producer sets the selling price of each unit at $40, the same as the cost price. This suggests he makes no profit if he sells the goods at this price. However, he is also insistent not to sell below $40 because that would mean he incurs a loss.
03

Market Factors and Competition

Other factors also could influence his price like market demand, competition, and consumer buying power. If there's high demand and little competition, it could be justified to keep prices on the higher side. As he knows his market and costs better, he is best suited to set his prices.

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