Question

Soft key is trying to determine how best to produce its newest product, dvork keyboards. The keyboards could be produced in-house using either process A or process B, or purchased from a supplier. Cost data are given below. For what levels of demand should each process be chosen?

Answer 1

The firm should choose the production technology with the lowest total cost based on the level of demand. It is important to consider the cost of machines and the shift towards less capital and more labor as demand increases. The decision depends on the specific costs of each process and the expected demand.

Step-by-step explanation:

The firm should choose production technology 2 since it has the lowest total cost. Because the cost of machines increased (relative to the previous question), you would expect a shift toward less capital and more labor.

In the long run, all factors (including capital) are variable, so the firm can adjust its production technology based on the level of demand. For low levels of demand, it may be more cost-effective to produce the keyboards in-house using process A or process B. If the demand increases to a level where it is more economical to purchase the keyboards from a supplier, then the firm should choose that option. The decision depends on the specific costs of each process as well as the expected demand.