Question

• Clean Fifteen Organic Foods bakes and sells 80 apple pies a day using one mixer and one oven. Its rival, Dirty Dozen Pesticide Surprise, produces 130 apple pies using 2 mixers and 2 ovens. The shops use the exact same technology to make apple pies and have the same number of workers and the same size building. Suppose Dirty Dozen increases its capital equipment by one mixer and one oven. Which of the following is the most realistic expectation Dirty Dozen should have about how much its production will increase with the new equipment?

Answer 1

Both firms have same technology and same number of workers and same size of building.

First firm (Clean Fifteen Organic Foods) produces 80 pies using one mixer and one oven.

Second firm (Dirty Dozen Pesticide Surprise) produces 130 pies using 2 mixers and 2 ovens.

As both firms are same in technolgical and other perspectives, increase in number of mixers and ovens by 1 has increased the production by 50 pies.

As we know that as more and more equipment are added margina product keeps on decreasing.

So, if one more mixer and oven is added then production will increase but by less than 50 pies. This means marginal product of new mixer and over would be less than 50 pies.

Thus,

The most realistic expectation Dirty Dozen should have about how much its production will increase is that its production will increase by Less than 50 pies.