Question

Suppose a profit-maximizing firm can produce 100 units of a hypothetical product, wendals (selling at a price of $1 per unit), by combining labor, land, capital, and entrepreneurial ability in each of the four ways shown in the table below. Assume further that the firm can hire labor at $6 per unit, capital at $4 per unit, and entrepreneurship at $2 per unit.

   TECHNIQUES

	A	B	C
LABOR	4	6	8
LAND	4		3
CAPITAL	5	4
ENTREPRENEURSHIP	1	1	1
TECHNIQUE COST	$62		$66
REVENUE
PROFIT		$34

3. The total revenue for this firm is________ dollars.

4. The price of land is _________ dollars.

5. The cost of technique B is _______ dollars.

6. The profit for technique C is ________ dollars.

7. The amount of land embedded in technique B is _________ units.

8. The amount of capital embedded in technique C is _________ units.

9. This firm will earn a profit of ______ dollars.

10. If the price of wendals increases to $2, then which technique will this firm use? ____________

Answer 1

Ans 3.) Total revenue = Price x quantity

= 100 × 1 = $100

Ans 4.) As we know that the total cost in technique A is $62 which is calculated as follows:

62 = 4 labor + 5 capital + 4 land + 1 entrepreneurship

62 = 6(4) + 4(5) + 4 land + 2

62 = 24 + 20 + 4land + 2

4 land = 62 - 46

4 land = 16

Land price = 16÷4 = $4

Ans 5.) Cost of technique B is as follows:

Cost = Revenue - Profit

= 100 - 34

Cost = $66

Ans 6.) Cost of technique C is as follows:

Cost = 8 labor + 3 land + 1 entrepreneurship + capital cost

66 = 8(6) + 3(4) + 1(2) + capital cost

66 = 62 + capital cost

Capital cost = 66 - 62 = $4

Therefore, one unit of capital is being used in the technique C.

Profit for technique C = 100 - 66 = $34

Ans 7.) Total cost in technique B = Revenue - Profit

= 100 - 34

Total cost = $66

66 = 6labor + cost of land + 4 capital + 1 entrepreneurship

66 = 6(6) + land cost + 4(4) + 1(2)

66 = 36 + land cost + 16 + 2

Land cost = 66 - 54

Land cost = $12

Quantity of Land = land cost ÷ price of land

Quantity of land = 12 ÷ 4

Quantity of land in technique B = 3 units

Ans 8.) Alredy calculated in part 6.