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The directors of a business firm once fired its president for refusing to produce an extra unit that would have cost only $1 and could have been sold for $3
The directors of a business firm once fired its president for refusing to produce an extra unit that would have cost only $1 and could have been sold for $3. Were they crazy? Why or why not?
Expert Solution
The president has taken a decision to stop production, and the management was not happy and fired him. The reason provided is to produce an extra unit that would have cost only $1 and could have been sold for $3.
The decision of management is based on the marginal analysis of the product, in which the marginal revenue earned is $3, and the marginal cost is $1. The marginal cost is the variable cost, and the marginal revenue is able to absorb fully the variable cost, and a portion of fixed costs. It should continue producing until its marginal revenue and cost become equal.
The decision to fire the president is justified.
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