Question

In: Economics

Suppose you are the manager of a firm producing soap. In the long-run, you are deciding...

Suppose you are the manager of a firm producing soap. In the long-run, you are deciding from which of the following three production processes to choose your production method. Your wish, in order to maximize profits, is to choose the most economically efficient method of production that produces 100 units of soap per day.

Method Units of Labor Units of Capital Labor Cost Capital Cost
Capital Intensive 1 worker 5 machines
Even Split 3 workers 3 machines
Labor Intensive 6 workers 1 machine

  

If the cost of hiring labor is $50 per worker and the cost of using capital equipment is $60 per machine, fill in the total labor cost and total capital cost in the above table.  

Remembering the concept of average total cost from Chapter 5, which production method yields the lowest per unit cost of output, and hence, the economically efficient method of production for 100 units of soap?

Solutions

Expert Solution

The total cost of labor for the firm at $50 per worker is

The total cost for capital is at the rate of $60 per machines is

Using these formulas the table is completed as

Method Units of Labor Units of Capital Cost of Labor Cost of capital
Capital Intensive 1 5 50 300
Even Spit 3 3 150 180
Labor Intensive 6 1 300 60

The total cost of production is the total cost of capital and labor. This is calculated in the table in the Total cost column. The average cost per unit is then calculated by dividing the total cost by 100.

Method Total Cost The average cost per unit for 100 units
Capital Intensive 350 3.5
Even Spit 330 3.3
Labor Intensive 360 3.6

The average cost per unit is lowest or minimum for the production method Even Split. Therefore, the economically efficient methos is "Even Spit".


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