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What is the production level for the maximum profit?

a) 50 units
b) 100 units
c) 150 units
d) 200 units

User Stillie
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Final answer:

The production level for maximum profit can be determined by comparing the total costs of different production methods. Initially, Method 1 is the most cost-effective, and remains so even when the cost of labor doubles, thus it represents the production level for the maximum profit.

Step-by-step explanation:

To find the production level for maximum profit, we need to consider the cost of both labor and capital. Initially, labor costs $100 per unit and capital costs $400 per unit. The total costs for each method would be as follows:

  • Method 1: (50 units of labor × $100) + (10 units of capital × $400) = $9,000
  • Method 2: (20 units of labor × $100) + (40 units of capital × $400) = $18,000
  • Method 3: (10 units of labor × $100) + (70 units of capital × $400) = $29,000

Thus, the best production method based on the lowest cost is Method 1.

If the cost of labor rises to $200 per unit, the costs for each method would be:

  • Method 1: (50 units of labor × $200) + (10 units of capital × $400) = $13,000
  • Method 2: (20 units of labor × $200) + (40 units of capital × $400) = $18,000
  • Method 3: (10 units of labor × $200) + (70 units of capital × $400) = $29,000

In this scenario, Method 1 still remains the most cost-effective production method.

User Vugluskr
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