Evaluating a Production Decision
The manager of a small company that produces widgets in a competitive market (where they must accept the market price) is currently producing 1,000 widgets per day. The market price for a widget is $50. At the current production level, the company's average total cost is $45 per widget, and the marginal cost to produce the 1,001st widget is $52. The manager decides to produce the 1,001st widget, reasoning that 'since the price of $50 is still higher than our average cost of $45, we are making a profit on each widget, so we should produce more.' Critically evaluate the manager's decision and reasoning. Should the company produce the 1,001st widget? Justify your answer based on the principles of profit maximization.
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