2. A refrigerator manufacturer is planning capacity expansions. They havedetermined that their capacity cost follows the equation below, where f(y) = kya,is the cost of a plant that can produce y units annually.f(y) = 0.0107y⁰.62They have determined that when a = 0.62, using a = u/(e" - 1) gives a value u =0.89.Their demand for refrigerators is growing at a rate of 5000 units annually, andthey use a 16% interest rate for discounting.At the optimal capacity addition level, what does each capacity installation cost?

Capacity Cost are in the form : F(y) = kya For above example , a = 0.62 & k = 0.0107 Demand is…

2. A refrigerator manufacturer is planning capacity expansions. They have determined that their capacity cost follows the equation below, where f(y) = kya, is the cost of a plant that can produce y units annually. f(y) = 0.0107y0.62 They have determined that when a = 0.62, using a = u/(eu - 1) gives a value u = 0.89. Their demand for refrigerators is growing at a rate of 5000 units annually, and they use a 16% interest rate for discounting.

2. A refrigerator manufacturer is planning capacity expansions. They have determined that their capacity cost follows the equation below, where f(y) = kya, is the cost of a plant that can produce y units annually. f(y) = 0.0107y0.62 They have determined that when a = 0.62, using a = u/(eu - 1) gives a value u = 0.89. Their demand for refrigerators is growing at a rate of 5000 units annually, and they use a 16% interest rate for discounting.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 7MC

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