Final answer:
The business scenario presented involves calculating production costs for a widget company, with particular focus on labor costs, pricing strategy, and economies of scale. Workers' wages, productivity, and the impact on pricing as well as the benefits of scaling up production to reduce average costs are key considerations.
Step-by-step explanation:
The question revolves around the production costs and pricing strategies within a widget manufacturing company. The company has fixed costs such as the monthly rent of $5,000. Each widget incurs variable costs of $35 for materials and $22 for labor. If widget workers are paid $10 per hour, this piece of information allows us to determine the labor cost per widget. Considering the efficiency where a worker can produce two widgets per hour, this will result in a labor cost of $5 per widget (since $10 divided by the two widgets produced equals $5 labor cost per widget). However, the given example posits that if a widget is sold for $4, generating $8 in revenue per hour for the firm, a profit-maximizing firm would not pay more than the revenue generated per worker, which is $8 per hour in this case.
Additionally, the concept of economies of scale is exemplified through Figure 7.9, where the average cost of production per alarm clock decreases as the quantity of output increases. The average costs decrease from $12 to $8 to $4 as the production level scales from a small-sized factory with an output of 1,000 units to a large factory with an output of 5,000 units. This demonstrates how increasing production can lead to a reduction in average costs, contributing to higher profitability.