Critical analysis Q8 A dressmaker uses labor and capital (sewing machines) to produce dresses in a competitive market. Suppose the last unit of labor hired cost $500 per month and increased output by 350 dresses. The last unit of capital hired (rented) cost $1,000 per month and increased output by 400 dresses. Is the dressmakerminimizing cost? If not, what changes need to bemade?

The dressmaker is not minimizing cost.

Explanation:

The concept so illustrated captures what Marginal Benefit is all about - a total sum a client will pay for an incremental unit consumption.

From the scenario painted, we are saddled with a situation whereby labour and capital represent the critical factors of production in organization's production processes. Here, an increase in labour expenditure results to an increase in output, however proportionate. This can also be said of capital.

For Labour, the last unit of labor hired cost $500 per month and increased output by 350 units. However, for capital, a $1000 per month expenditure led to an increase of 400 in units output.

Obviously, it will be observed that a given amount of labour expenditure led to a more increased in unit outputs, compared with capital expenditure. To put it better, if $500 labour spending could yield 350 outputs, then increasing this to $1000 labour spending will effortlessly doubled this outputs to, say, 700. This is not the same with capital spending which already has $1000 and only posted 400 outputs to show for it.

Thus, to minimize cost and improve the operational efficiency, the management should boost the labour expenditure, while taking a drastic cut on the capital spending. With this, cost will be minimized and a lot will be generated in sales via increased outputs.

The dressmaker is not minimizing cost.

Explanation:

Marginal benefit and marginal cost are two terms associated to the cost of a product change. Marginal benefit occurs as a measurement concerned with the consumer while marginal cost is concerned with the manufacturer. Marginal benefit is the maximum total of money a consumer wishes to pay for an additional unit of goods or services. Marginal cost is the change in cost when additional units of goods or services are produced. The aim of analyzing marginal cost is to know the moment or stage a firm can achieve economies of scale.

Marginal benefit is a small change in a consumer's advantage if an additional unit of good or service is used. A marginal benefit declines as a consumer decides to consume more of a good.