1. The table below shows total output of a bakery of shop that makes bread for v
ID: 1093417 • Letter: 1
Question
1. The table below shows total output of a bakery of shop that makes bread for various amounts of labor and capital that are assumed to be the only inputs the bakery needs for making bread. In addition, the price of labor is $8 per hour and the price of capital is $12 per machine-hour and the bakery sells it output competitively at $2 per unit.
Production data
Units of Labor
Total output (Total Benefit)
Units of Capital
Total Output (Total Benefit)
0
0
0
0
1
12
1
13
2
22
2
22
3
28
3
28
4
33
4
32
5
37
5
35
6
40
6
37
7
42
7
38
a. What is the least-cost combination of labor and capital for the bakery to use in producing, say, 50 units of bread? Show all your work. (10 points)
b. If the manager currently has 5 units of labor and 1 units of capital, what must be true? Justify your answer. (5 points)
Units of Labor
Total output (Total Benefit)
Units of Capital
Total Output (Total Benefit)
0
0
0
0
1
12
1
13
2
22
2
22
3
28
3
28
4
33
4
32
5
37
5
35
6
40
6
37
7
42
7
38
Explanation / Answer
C = 8L + 12K
for cost minimization, MPl/MPk = w/k
(dQ/dL)/(dQ/dK) = 2/3
50/3 / 50/2 = 2/3
so least cost combination will give labor=3, capital=2
If the manager currently has 5 units of labor and 1 units of capital, it is entailing hifher costs and therefore he should lay off workers and adopt higher greater use of the machine to minimize its costs.
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