The solution to problem of how to produce in a capitalist economy is solved by

Step 1: Analyze the question Every economy must answer three basic questions: What to produce? How to produce? For whom to produce? This question is about the "how to produce" problem in a capitalist (free market) economy.

Step 2: Explain the concept In a capitalist economy, resources are privately owned and decisions are guided by the price mechanism and the profit motive. Producers want to maximize profit, so they choose the production technique that gives the lowest cost for a given output. Depending on the relative prices of labour and capital, this may be labour-intensive or capital-intensive. Neither is automatically chosen, so the deciding principle is cost.

By contrast:

• In a planned (command) economy, the government decides the method of production.
• In a traditional economy, custom decides.

Step 3: Evaluate the options

• A. Combining aid labour means of production: This is garbled and does not state a decision rule.
• B. The producers involves: This is also garbled and incomplete. Producers do decide, but the option does not say on what basis.
• C. Capital-intensive method: Not always chosen. It is used only when it is cheaper.
• D. Labour-intensive method: Not always chosen either. It is used only when it is cheaper.
• E. Using the method of production with the least cost: This is correct. It reflects profit maximization and the efficient use of resources in a market economy.

Step 4: Answer The "how to produce" problem in a capitalist economy is solved by choosing the least-cost method of production, which is option E.

Exam tip: Remember the pairing:

• What to produce → consumer demand (consumer sovereignty)
• How to produce → least-cost method
• For whom to produce → purchasing power (ability to pay)

Whenever you see "how to produce" with "capitalist," think least cost.