(Table: Droids and Moisture Output) Luke Skywalker operates a moisture farm on the planet Tatooine.The moisture farm utilizes droids.Luke's production function is given in the table Droids and Moisture Output.A barrel of moisture sells for 50 republic credits.A droid costs 675 republic credits per month to rent.How many droids should Luke rent?
A)one
B)two
C)three
D)four

Question

Quizplus · Accepted Answer

When comparing the marginal product of each additional droid to its cost, we look for the point of diminishing marginal returns. At two droids, each additional droid yields only an extra 10 barrels per month, which does not outweigh the cost of the droid. At three droids, the marginal product of the third droid is 15 barrels of moisture per month, which is greater than the cost of renting a third droid. Therefore, Luke should rent three droids in order to maximize his profits.

(Table: Droids and Moisture Output) Luke Skywalker Operates a Moisture