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Optimal Input Mix. Hydraulics Ltd. has designed a pipeline that provides a throughput of 70,000 gallons of water per 24-hour period. If the diameter of the pipeline were increased by 1 inch, throughput would increase by 4,000 gallons per day. Alternatively, throughput could be increased by 6,000 gallons per day using the original pipe diameter with pumps that had 100 more horsepower.
A. Estimate the marginal rate of technical substitution between pump horsepower and pipe diameter.
B. Assuming the cost of additional pump size is $600 per horsepower and the cost of larger diameter pipe is $200,000 per inch, does the original design exhibit the property required for optimal input combinations? If so, why? If not, why not?
Total Profit
The overall financial gain made by a business after subtracting all costs from the total revenue.
Maximum Profit
The highest possible financial gain achievable from business activities, after deducting all related expenses.
Market Maker
A firm or individual that actively quotes two-sided markets, providing liquidity and stability by being prepared to buy or sell at publicized prices.
Transactions
The act of buying, selling, or exchanging goods, services, or financial assets in a market.
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