Question

Q3. Assume that a business firm finds that its profit is greatest when it produces $40 worth of
product A. Suppose also that each of the three techniques shown in the table below will produce
the desired output.
(a) With the resource prices shown, which technique will the firm choose? Why? Will
production using that technique entail profit or loss? What will be the amount of that profit
or loss? Will the industry expand or contract? When will that expansion or contraction end?
(b) Assume now that a new technique, technique 4, is developed. It combines 2 units of labor,
2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the
table, will the firm adopt the new technique? Explain your answer.
(c) Suppose that an increase in the labor supply causes the price of labor to fall to $1.50 per
unit, all other resource prices remaining unchanged. Which technique will the producer
now choose? Explain.
(d) “The market system causes the economy to conserve most in the use of resources that are
particularly scarce in supply. Resources that are scarcest relative to the demand for them
have the highest prices. As a result, producers use these resources as sparingly as is
possible.” Evaluate this statement. Does your answer to part c, above, bear out this
contention? Explain.

Answer 1

Solution:

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