A firm is pondering over the introduction of a new good with a profit contribution of...

A firm is pondering over the introduction of a new good with a profit contribution of $70 per unit. Each unit of the good uses 2 units of input A and 3 units of input B. The shadow price of A is $10, and the shadow price of input B is $15. Which of the following statements is true?

		The firm should produce the new good.
		The opportunity cost of producing the new good is $75.
		The firm should not produce the new good.
		Producing the new good will earn a profit of $10.
		Producing the new good will earn a loss of $5.

Solutions

Expert Solution

The firm should produce the new well.

Explanation: Shadow price refers to the estimated price when there is no market price available

The total cost of producing 1 unit of the new good = 2*$10 + 3*$15 = $20 + $45 = $65

So, $65 is the marginal cost. The marginal revenue is $70.

Since marginal revenue is higher than the marginal cost, the good should be produced.

Rahul Sunny answered 1 year ago

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