Since the net gain from producing a second hat is positive ($30/day), Lorenzo should produce a second crochet hat per day.
How to solve
To determine whether Lorenzo should produce a second crochet hat per day, we need to calculate the potential gain or loss from producing an additional hat.
Potential gain from producing a second hat:
Number of hats produced = 2 hats/day
Profit per hat = $20/hat
Total profit = Number of hats produced * Profit per hat = 2 hats/day * $20/hat = $40/day
Cost of producing a second hat:
Opportunity cost = $10/day
Net gain or loss:
Net gain or loss = Total profit - Opportunity cost = $40/day - $10/day = $30/day
Since the net gain from producing a second hat is positive ($30/day), Lorenzo should produce a second crochet hat per day.
The Complete Question
Suppose Lorenzo is currently using combination D, producing one crochet hat per day. His opportunity cost of producing a second crochet hat per day is $10. Lorenzo sells each crochet hat for $20. Determine whether Lorenzo should produce a second crochet hat per day.