Question

Assume that a business firm finds that its profit is greatest when it produces $\$ 40$ worth of product A. Suppose also that each of the three techniques shown in the following table will produce the desired output. a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end? b. Assume now that a new technique, technique $4,$ is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer. c. Suppose that an increase in the labor supply causes the price of labor to fall to $\$ 1.50$ per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain. d. "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Evaluate this statement. Does your answer to part $c,$ above, bear out this contention? Explain.

Name: Problem 4, Chapter 2: Economics: Principles, Problems, and Policies
Uploaded: 2021-02-03T13:03:51-08:00
Duration: 15 min 43 s
Channel: Oluwadamilola Ameobi

   Assume that a business firm finds that its profit is greatest when it produces $\$ 40$ worth of product A. Suppose also that each of the three techniques shown in the following table will produce the desired output.  
a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end?
b. Assume now that a new technique, technique $4,$ is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer.
c. Suppose that an increase in the labor supply causes the price of labor to fall to $\$ 1.50$ per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain.
d. "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Evaluate this statement. Does your answer to part $c,$ above, bear out this contention? Explain.

Economics: Principles, Problems, and Policies

Campbell R.… 21st Edition

Chapter 2, Problem 4

Instant Answer

Solved by Expert Oluwadamilola Ameobi

02/03/2021

Step 1

This can be done by multiplying the price of each resource by the units required for each resource and then adding them up. For technique 1, the total cost is $3 \times 5 + $4 \times 2 + $2 \times 2 + $2 \times 4 = $15 + $8 + $4 + $8 = $35$. For technique 2, Show more…

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Assume that a business firm finds that its profit is greatest when it produces $\$ 40$ worth of product A. Suppose also that each of the three techniques shown in the following table will produce the desired output. a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end? b. Assume now that a new technique, technique $4,$ is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer. c. Suppose that an increase in the labor supply causes the price of labor to fall to $\$ 1.50$ per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain. d. "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Evaluate this statement. Does your answer to part $c,$ above, bear out this contention? Explain.

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Key Concepts

Market Adjustment and Industry Equilibrium

Market adjustment involves the response of producers to economic profits or losses. If a chosen technique generates losses or profits, it sends signals that the market is out of equilibrium, prompting either industry contraction or expansion. Competition drives the market toward an equilibrium state where firms earn normal profits, and adjustments persist until no firm has an incentive to change its production method.

Technological Change and Innovation

Technological change refers to the development of new production methods or improvements in existing techniques. Such innovations can alter the input requirements and efficiency of production processes. A new technique may offer a lower-cost method of achieving the same output, leading firms to re-evaluate their production strategies based on updated technological options.

Profit Maximization

This concept involves determining the output level at which a firm's revenue minus its cost is as high as possible. It implies choosing a production plan where the marginal benefit of an additional unit matches the marginal cost, thus ensuring that resources are used in the most efficient way to generate the highest possible profit.

Cost Minimization and Technique Selection

In practice, firms have several techniques to produce a given output. Cost minimization involves choosing the exact combination of inputs that produces the desired output at the lowest possible cost. This requires comparing the total costs of different input combinations, given prevailing resource prices, and selecting the production technique that minimizes expenditure while meeting production targets.

Resource Pricing and Scarcity

Resource pricing reflects the relative scarcity of the inputs in the market. Scarce resources will naturally command higher prices, which in turn influences production decisions. Firms must strategically allocate inputs, using expensive resources sparingly, to minimize overall cost and maximize profit.

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Transcript

00:01 So this question says that as a firm finds its profit is greater when it produces $40 dollars watts of product a.

00:13 So its profit is greater when it produces $40 watt of product a.

00:21 And suppose that each of three techniques shown in the following, the table we have, will produce a desired result.

00:31 Now the first question, with the resources price shown, which technique would the firm choose? why, the production using that technique until profit or loss? what would be the amount of that profit or loss? would the industry expand or contract? when will that expansion or contraction end? so to determine the total cost using each technique will multiply, the price per unit by the unit required for each resource multiply price per unit by unit required to get the total cost using each technique so for technique one from the table from for technique one three multiplied by five plus four multiplied by two plus 2 multiply by 2 plus 2 multiply by 4 is equal to 15 plus 8 plus 4 plus 8 and this is equal to 35 and this is 1 now for technique 2 we're going to have 3 multiplied by 2 plus 4 multiply by 4 plus 2 multiply by 4 plus 2 multiply by 4 plus 2 multiply by 4 plus 2 multiply by 4 plus 2 multiply by 4 plus 2 multiply by and this is 6 plus 16 plus 8 plus 4 and this is equal to 34 dollars so this is the second one now moving on for technique 3 we're gonna have 3 multiplied by 3 plus 4 multiply by 2 plus 2 multiply by 5 plus 2 multiplied by 4 and this is 9 plus 8 plus 10 plus 8 and this is equals 35 now the firm will choose going back to the techniques the firm will choose technique 2 because he has the lowest production cost and in the product is sold for 40 dollars and the only cost that's 4 dollars it will it will profit 6 dollar per unit so because it has the lowest production cost and if if it is sold for 40 dollars selling price and it costs and it costs 34 dollars to make then therefore the profit to be six dollar per units and this industry will expand because a profit will be made and the expansion will stop when the production will stop product is no longer profitable.

05:33 It will stop when the product is no longer available.

05:51 Now moving on to the second question, assume now that a new technique, technique 4 is developed and it combines two units of labor, two of land, you combine two units of labor, two units of land, and six units of capital, and three units of entrepreneurial ability.

06:53 Now, in the view of the resources price in the table, the firm adopts the new technique and explain your answers.

07:02 So a new technique that requires two units of labor, two units of land, six units of capital, and three needs of intrepidinary ability, the cost to produce the product with this new technique would be 3 multiplied by 2 plus 4 multiplied by 2 plus 2 multiplied by 6 plus 2 multiplied by 6 plus 2 plus 2 plus 2 plus 2.

07:41 So it costs $32 to produce and we can also that the production cost using this technique is even lower so the firm should adopt this new technique.

07:52 The firm should adopt this new technique.

08:23 So moving on, we have see.

08:38 Suppose that an increase in the labor supply causes the price of labor to fall to a dollar and 50 units, a dollar 50 per unit, all other resources, prices remain unchanged.

09:00 What technique would the producer now choose? explain so the labor cost has been reduced to a dollar and fifty per unit now the new production cost with each technique will now be recalculated so for technique one the production cost will be 1 .5 because of the 150 multiply by 5 plus 4 multiply by 2 plus 2 multiply by 2 plus 2 2 multiplied by 4 and this is 7 .55 plus 8 plus 4 plus 8 and this is equal to 27 .15...

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