Question

Peerless Manufacturing is a profit-maximizing firm and, operating at capacity, it can produce 50 units of output per production period using any one of the following techniques of production. The market price of land, labor, capital are $5, $4, $6, respectively. And the profit associated with T1 is $124.

TECHNIQUE	T1	T2	T3	T4
LAND	8	8	8	8
LABOR	16	18	20	22
CAPITAL	12	8	6	3

4. The price of a unit of output is _______.
5. If this firm uses T2 it will realize a profit of _______.
6. If this firm uses T3 it will realize revenue of ______.
7. If this firm uses T4 it will realize a profit of _______.
8. The technique that minimizes the cost of production is _______.
9. If the market price of labor increases to $5, ceteris paribus, then the technique that maximizes profit is ______.

Answer 1

1. Price of the output is calculated as(at T1):

Output×price of output= T1×cost of input+Profit

50×p= ( 8×$5+16×$4+12×$6)+$124

50×p= ($40+$64+$72)+$124

50×p = $176+$124

50×p = $300

p = $300÷50

p = $6.

2. If firm uses T2, firm will realise a profit of:

Profit= Output×price of output-T2×cost of input

Profit= 50×$6-(8×$5+18×$4+8×$6)

Profit= $300-($40+$72+$48)

Profit= $300-$160

Profit= $140

3.If firm uses T3, firm will realise a profit of:

Profit= Output×price of output-T3×cost of input

Profit= 50×$6-(8×$5+20×$4+6×$6)

Profit= $300-($40+$80+$36)

Profit= $300-$156

Profit= $144

4. If firm uses T4, firm will realise a profit of:

Profit= output×price of output-T4×cost of input

Profit= 50×$6-(8×$5+22×$4+3×$6)

Profit= $300-($40+$88+$18)

Profit= $300-$146

Profit= $154

5. Profit is maximum in case of T4 i.e. $154. So, at T4 cost will be minimized.

6. When the price of labour increases to $5, then profit will be :

T1; 50×$6-(8×$5+16×$5+12×$6) = $300-$192 =$108

T2, 50×$6-(8×$5+18×$5+8×$6) = $300-$178 = $122

T3; 50×$6-(8×$5+20×$5+6×$6) = $300-$176 = $124

T4; 50×$6-(8×$5+22×$5+3×$6) = $300-$168 = $132

Thus, profit will be maximum at T4.