Question

Consider a firm's per-period (e.g., hourly) production process. If it employs 1 unit of labor, then how many units of output will be produced?

1) 6 units
2) 10 units
3) 12 units

Answer 1

The best production method based on the given costs is Method 1, both before and after the increase in labor cost. Method 1 has the lowest total cost initially and remains the most cost-effective even when the labor cost doubles.

Step-by-step explanation:

The student's question pertains to choosing the best production method for a firm given the costs of labor and capital. To determine the best production method, we need to calculate the total cost for each method given the cost of labor and capital:

• Method 1: Total cost = (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $9,000
• Method 2: Total cost = (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $18,000
• Method 3: Total cost = (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $29,000

Therefore, Method 1 is the most cost-effective with a total cost of $9,000. If the cost of labor rises to $200/unit, the calculations are:

• Method 1: Total cost = (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $14,000
• Method 2: Total cost = (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $20,000
• Method 3: Total cost = (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $30,000

With the increased labor cost, Method 1 remains the most cost-effective choice for the company. Economic conditions, such as the ones that occurred in the United States during the 1970s, can lead to a shift in production technology preferences from capital-intensive to labor-intensive, as indicated by the historical changes in worker productivity and labor costs.