Final answer:
When deciding between two machines with a MARR of 15%, production technology 2 is optimal when machine costs are higher, encouraging less capital usage. Conversely, production technology 3 is better when machine costs are cheaper, favoring more capital use. The choice depends on current machinery cost trends and the factory's commitment to aligning with its MARR goals.
Step-by-step explanation:
When a factory is evaluating between two machines, it must consider the minimum attractive rate of return (MARR), which in this case is set at 15%. This rate is a benchmark that a project or investment must exceed in order to be considered viable. In this scenario, the decision revolves around choosing either production technology 2 or production technology 3, with the determination based on which option yields the lowest total cost.
The information provided indicates that production technology 2 becomes preferable if the cost of machines increases, leaning towards a reduction of capital and an increase in labor. This situation can prompt a shift away from a capital-intensive setup due to the increased costs associated with machinery. Conversely, production technology 3 is presented as the better choice when machine hours are cheaper. With lower costs tied to machinery, the firm might lean towards a more capital-intensive technology, optimizing the use of machines in production processes.
It is crucial to consider the broader economic and market context when making such choices. For example, the historical context in the 1970s United States suggests that in a competitive market where demand is not sufficient for all firms to operate efficiently (i.e., for all to reach the bottom of the average cost curve), a shakeout can occur, potentially resulting in less competition in the long run. This shakeout affects the strategic decision on whether to select a more labor-intensive technology (production technology 2) or a more capital-intensive one (production technology 3).
In conclusion, the correct course of action would be to select the machine that aligns with the firm's MARR while also considering whether the machinery costs are likely to increase or decrease and how that impacts the labor and capital balance. Hence, if machine costs are higher, technology 2 should be chosen; if machine costs are lower, technology 3 would be the preferable option. Taking these factors into account will guide the factory to make an informed decision that contributes to their long-term economic viability.
To provide the mention correct option answer in the final answer based on the given scenario and without the specific numerical cost data, one must consider the economic principles explained above: If machine costs rise, production technology 2 should be chosen. Conversely, if machine costs are lower, production technology 3 should be selected.