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