Shaun Sinclair, manager of Sinclair 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.
Shaun wants to be ready with material, labor, and foremen to meet the demand for housing.
Last year, Shaun built and sold 40 starter homes which is the most popular model.
Shaun thinks that his sales will increase to 50 units over the current year.
The going market price for this model (which Shaun and his numerous competitors have charged) has been $275,000.
In addition, Sinclair Construction's marginal cost of building this model averages $245,000.
(a) Based on these facts, recommend a course of action for Shaun.
(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 Shaun's most profitable course of action? Explain.
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a) Since the starter homes seems to be a competitive market, and there is still scope for increasing the output as the price is above the marginal cost of production ($275000>$245000). With the forecasted increase in demand of 50 units, Shaun can increase his production by keeping the material inputs, labor, and other variable inputs ready for production....
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