A firm with two factories, one in Michigan and one in Texas, has decided that it should produce a total of 500 units to maximize profit. The firm is currently producing 200 units in the Michigan factory and 300 units in the Texas factory. At this allocation between plants, the last unit of output produced in Michigan added $5 to total cost, while the last unit of output produced in Texas added $3 to total cost.
a. Is the firm maximizing profit? If so, why? If not, what should it do?
b. If the firm produces 201 units in Michigan and 299 in Texas, what will be the increase (decrease) in the firm’s total cost?