Question

4. A small company that shovels sidewalks and driveways has 100 homes signed up for its services this winter. It can use various combinations of capital and labor: lots of labor with hand shovels, less labor with snow blowers, and still less labor with a pickup truck that has a snowplow on front. Summarize these methods in this way:

Method 1: 50 units of labor, 10 units of capital Method 2: 20 units of labor, 40 units of capital Method 3: 10 units of labor, 70 units of capital

If hiring labor for the winter costs $100/unit and a unit of capital costs $400, what production method should be chosen? What method should be chosen if the cost of labor rises to $200/unit?

Answer 1

Ans:

A) Calculation of production cost under each method

Method 1

Labor = 50 * $100 = $5000

Capital = 10 * $400 = $4000

Total = $9000

Method 2

Labor = 20 * $100 = $2000

Capital = 40 * $400 = $16000

Total = $18000

Method 3

Labor = 10 * $100 = $1000

Capital = 70 * $400 = $28000

Total = $29000

Since the production cost is lower in case of method 1 , method 1 should be chosen

A) Calculation of production cost under each method if labor cost rises to $200/unit.

Method 1

Labor = 50 * $200 = $10000

Capital = 10 * $400 = $4000

Total = $14000

Method 2

Labor = 20 * $200 = $4000

Capital = 40 * $400 = $16000

Total = $20,000

Method 3

Labor = 10 * $200 = $2000

Capital = 70 * $400 = $28000

Total = $30,000

Since the production cost is lower in case of method 1 , method 1 should be chosen