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Strategic Analysis of Production Technology
A company is evaluating a potential upgrade to its production process. The current process (Technology A) has low fixed costs but relatively high per-unit variable costs. The proposed new process (Technology B) involves a significant initial investment, leading to high fixed costs, but offers much lower per-unit variable costs. On a graph of total profit versus quantity, Technology A's profit curve starts just below the horizontal axis and has a relatively narrow, sharp peak. Technology B's profit curve starts much lower on the vertical axis but has a broader, higher peak that occurs at a greater quantity of output. Analyze the two described profit curves. Explain the economic reasoning for why the profit-maximizing quantity of output is higher for Technology B, even though it has higher fixed costs.
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Strategic Analysis of Production Technology