Question

Resource	Resource prices	Possible production Techniques
		#1	#2	#3	#4	#5
Land	$4	2	4	2	4	4
Labor	3	1	2	4	1	3
Capital	3	5	2	3	1	2
Entrepreneurial Ability	2	3	1	1	4	1

Answer the question using the following data, which show all available techniques for producing 20 units of a particular commodity.

question: If the firm can produce 20 units using technique 3 and can sell each good for $2, then

a. not be adopted because the profit is negative

b. be adopted and would earn the firm $31 in profit

c. be adopted and would earn the firm $30 in profit

d. be adopted and would earn the firm $9 in profit

Answer 1

The correct answer is D- Adopted and would earn the firm a profit of $9.

Adoption of any technique depends upon whether it gives a profit or not. We know that

Profit=Revene-Cost.

The revenue from technique 3 would be 2*20=40, as it will produce 20 units and sell each for $2.

The cost would the total cost of each input resource. Each resource will cost its per unit cost multiplied by how many units of that resource are being consumed in that technique. So, for technique 3

Total Cost=4*2 (Cost of land)+3*4 (cost of labor)+3*3 (cost of capital)+1*2 (cost of entrepreneurial ability)

Total cost=8+12+9+2

Total cost=31.

Hence, profit from technique 3=40-31=9.

As the profit is positive, the technique will be adpoted.