Cuzco Sweaters Company produces alpaca sweaters that use two inputs, materials and labor. During the past quarter, 4,000 sweaters were produced, requiring 16,000 pounds of material and 8,000 hours of labor. An engineering efficiency study commissioned by the local university revealed that Cuzco can produce the same 4,000 units of output using either of the following two combinations of inputs:

The cost of materials is $5 per pound; the cost of labor is $10 per hour.

Required:
1. Compute the output-input ratio for each input of Combination C1. Does this represent a productivity improvement over the current use of inputs? What is the total dollar value of the improvement? Classify this as a technical or an allocative efficiency improvement.
2. Compute the output-input ratio for each input of Combination C2. Does this represent a productivity improvement over the current use of inputs? Now, compare these ratios to those of Combination C1. What has happened?
3. Compute the cost of producing 4,000 units of output using Combination C1. Compare this cost to the cost using Combination C2. Does moving from Combination C1 to Combination C2 represent a productivity improvement?Explain.

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Materials Labor Combinations Cl C2 14,000 15,000 7,000 6,000