Question: It is characteristic of microchip production technology that a proportion of output is defective. Consider a small producer for whom the price of good chips

It is characteristic of microchip production technology that a proportion of output is defective. Consider a small producer for whom the price of good chips p is fixed. Suppose that proportion 1 - y of the firm's chips are defective and cannot be sold. Let c(y) denote the firm's total cost function where y is the number of chips (including defectives) produced. Suppose that with experience, the yield of good chips y increases. How does this affect the firm's production y? Does the firm compensate for the increased yield by reducing production, or does it take advantage of the higher yield by increasing production?

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