Final answer:
To decide whether Peter should increase his capital at an output quantity of 50, one should consider the changing costs of labor and capital, alongside potential profit margins. An economic analysis considering both production costs and competitive strategy is vital before making such a decision.
Step-by-step explanation:
When considering whether Peter should increase his capital at an output quantity of 50, various factors should be taken into account. To make an informed decision, one must look at the costs of capital and labor, as well as the potential profits from different production methods.
The scenario suggests different production methods with varying combinations of labor and capital. Initially, with labor costing $100/unit and capital costing $400/unit, the best production method should minimize costs while maximizing output. However, if labor costs rise to $200/unit, Peter would need to reassess which method is most cost-effective.
If other firms like 'B' are holding down output, and Peter believes that he can earn higher profits by increasing his output, this could be an opportunity for him. But an in-depth analysis of his production costs and profit margins at different levels of output is essential before increasing his capital investment.