Question

A firm has access to two production processes with the following marginal cost curves:

MC₁ = 0.4O₁
MC₂ = 3 + 0.2O₂
Where the subscript 1,2 indicates the production process.

a. If it wants to produce 9 units of output, how much should it produce with each process?

b. If it wants to produce 5 units of output?

Answer 1

To produce 9 units of output, the firm should use Process 1, while for 5 units of output, the firm should also use Process 1.

Step-by-step explanation:

To determine how much the firm should produce with each process, we need to compare the marginal costs of the two processes.

For 9 units of output:

• MC₁ = 0.4O₁ = 0.4(9) = 3.6
• MC₂ = 3 + 0.2O₂ = 3 + 0.2(9) = 4.8

The firm should produce 9 units of output using Process 1 since its marginal cost is lower (3.6) compared to Process 2 (4.8).

For 5 units of output:

• MC₁ = 0.4O₁ = 0.4(5) = 2
• MC₂ = 3 + 0.2O₂ = 3 + 0.2(5) = 4

The firm should produce 5 units of output using Process 1 since its marginal cost is lower (2) compared to Process 2 (4).