Chapter 7, Problem 42P

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

Chapter
Section

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital andlabor: intensive labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. To summarize, the method Choices are:Method 1: 50 units of labor, 10 units of capitalMethod 2: 20 units of labor, 40 units of capitalMethod 3: 10 units of labor, 70 units of capitalIf hiring labor for the winter costs $100/unit and a unit of capital costs what is the best production method? What method should the company use if the cost of labor rises to$20/unit?

To determine

The best production method if the cost of labor is $100/ unit and if the cost of labor rises to$200/ unit.

Explanation

The small company that shovels sidewalks uses various combinations of labor and capital. There are three methods given. Out of which, it is required to find the best production method. For this, it is needed to find the total cost involved in all the methods. The formula for cost of production is given below:

Total cost=(labor cost×units of labor)+(capital cost×units of capital)

In the Method 1:

The total cost for production is calculated as below:

Total Cost=( 50×100) +( 10×400)                 =$9000 In the Method 2: The total cost for production is calculated as below: Total Cost = ( 20×100 ) + ( 40×400 ) =$18000

In the Method 3:

The total cost for production is calculated as below:

Total Cost=( 10×100) +( 70×400)                 =\$29000

The lowest production cost is seen under the Method 1

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