Do You Remember Floppy Disks?

Do You Remember Those Storage Devices Called Floppy Disks Or Were The

Do you remember those storage devices called floppy disks, or were they already obsolete by the time you were born :)? According to Encyclopaedia Brittanica, "Floppy disks were popular from the 1970s until the late 1990s, when they were supplanted by the increasing use of e-mail attachments and other means to transfer files from computer to computer." One of the more popular brands was Memorex. We will go back in time for this question. Memorex manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Memorex hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks.

The estimated cost function is C = 10 + 2Q². a. What are Memorex's fixed costs? b. What is Memorex's marginal cost? Now suppose other firms in the market sell the product at a price of $8. c. How much should Memorex charge for the product? d. What is the optimal level of output to maximize profits? e. How much profit will be earned? f. In the long run, should Memorex continue to operate or shut down? Why?

Paper For Above instruction

Introduction

With the advent and eventual obsolescence of floppy disks in the late 20th century, understanding the cost structure of companies like Memorex that manufactured these storage devices provides insight into their production strategies and economic decision-making. This paper examines Memorex’s cost function, analyzes its fixed and marginal costs, and explores optimal pricing and output levels under competitive market conditions. The analysis also considers long-term operational viability, providing a comprehensive view of the firm's economic considerations related to its historical product line.

Analysis of Fixed Costs

The cost function provided is C = 10 + 2Q². Fixed costs are costs that do not vary with output level. These are expenses incurred regardless of whether the firm produces any units of the product. In the given cost function, the fixed costs are represented by the constant term. Therefore, Memorex's fixed costs are $10. This implies that regardless of the quantity of floppy disks produced, Memorex bears fixed costs totaling $10, which could include expenses like equipment amortization, administrative salaries, and facility costs that are not directly linked to the production volume of floppy disks.

Calculation of Marginal Cost

Marginal cost (MC) is the additional cost incurred by producing one more unit of output. It is derived by taking the derivative of the total cost function with respect to quantity (Q). Given the cost function C = 10 + 2Q², the derivative with respect to Q is: MC = dC/dQ = 4Q. This shows that the marginal cost depends linearly on the quantity produced, increasing with higher levels of output due to the quadratic nature of the variable cost component.

Market Price and Charge Determination

Market conditions are assumed to set the selling price at $8 per floppy disk, and firms in the market are selling at this price. For Memorex, determining the optimal price involves assessing whether to sell at this market price or to adjust their own pricing based on costs and profitability. Since the coins are at market equilibrium with other firms, Memorex would typically set its price close to the prevailing market price to remain competitive, especially because the products are perceived as identical. Therefore, the natural selling price would be approximately $8 per floppy disk.

Optimal Output Level for Profit Maximization

To maximize profit, Memorex should produce at the level where marginal cost equals the market price, as profit maximization occurs where MC = Price in a perfectly competitive market. Setting MC = 8 yields: 4Q = 8, which simplifies to Q = 2 units. Since the foundational cost function is in terms of dozen disks, and the problem states production in boxes of twelve disks, this implies that the optimal strategy would be to produce at the closest feasible quantity aligned with market demands—likely in multiples of 12 unless specific demand at other quantities is considered. For simplicity, assuming the company evaluates production per dozen disks, producing 12 disks (Q = 12 divided by the number of disks per unit) would be optimal at this stage. This is a nuanced point requiring further clarification, but the key insight remains: production should align with the quantity where MC equals the market price.

Profit Calculation

Profit is calculated by subtracting total costs from total revenue. If Memorex produces Q units and sells at a market price P of $8, total revenue (TR) is TR = P Q. Using Q = 12 as an illustrative example, TR = 8 12 = $96. Total cost for 12 disks can be computed as C = 10 + 2(12)² = 10 + 2144 = 10 + 288 = $298. Therefore, profit = TR - C = $96 - $298 = -$202, indicating a loss at this quantity. This suggests that, at the current market price, producing 12 disks would not be profitable. To optimize profits, Memorex should consider producing less, specifically at the level where MC equals the price, which is at Q = 8/4 = 2 disks. In practice, given the fixed costs and interpretation, Memorex would need to reassess its production volume to minimize losses or identify whether the market price covers average total costs at other production levels.

Long-Run Operational Decisions

In the long run, firms aim to operate only if they can cover their total costs, including fixed costs, and earn a normal profit. Given the negative profit scenario at the current market price, Memorex would be advised to consider whether to continue operations or shut down. Since fixed costs are $10 and variable costs increase with output, if Memorex cannot cover its average total costs at $8 per disk, the optimal decision would be to shut down in the short term to avoid further losses. Long-term viability depends on market conditions improving or the firm reducing costs. If market prices remain below average total costs, Memorex should cease operations to minimize losses, aligning with economic theory that suggests shutting down when losses exceed fixed costs over the long term.

Conclusion

Analyzing Memorex’s cost function reveals crucial insights into its operational and strategic decisions during the era of floppy disk's dominance. Fixed costs of $10 are minimal, but the quadratic variable cost causes increasing marginal costs with higher output. Market prices dictate production levels that maximize profits; however, the initial calculations suggest losses at standard production levels, emphasizing the importance of cost management and market analysis. In the long run, sustaining operations hinges on market prices surpassing average total costs. If not, strategic shutdowns or cost reductions are advisable to ensure economic sustainability. This historical analysis underscores how economic principles guide firm behavior in technology markets, even those that are now obsolete.

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