Assume a firm faces these costs: total cost of capital = $4,000; price paid for labor = $20 per labor unit; and price paid for raw materials = $8 per raw-material unit. Originally the firm produced 2,000 units of output by combining its fixed capital with 200 units of labor and 500 units of raw materials. Now the firm improves its production process so that it can produce 3,000 units of output by combining its fixed capital with 100 units of labor and 500 units of raw materials. What happened to total cost?

Question

Quizplus · Accepted Answer

The firm reduced labor from 200 to 100 units, saving $2,000 (100 units x $20/unit), while capital and raw material costs remained unchanged.

Assume a Firm Faces These Costs: Total Cost of Capital