Assume a firm faces these costs: total cost of capital $4,000; price paid for la
ID: 1122070 • Letter: A
Question
Assume a firm faces these costs: total cost of capital $4,000; price paid for labor =
$20 per labor unit; and price paid for raw materials = $8 per raw-material unit.
a. If the firm can produce 2000 units of output by combining its fixed capital
with 200 units of labor and 500 units of raw materials, then what are the
total cost and average total cost of producing the 2,000 units of output?
The firm now improves its production process so that it can produce 3,000
units of output by combining its fixed capital with 100 units of labor and 500
units of raw materials. What are the total cost and average total cost of
producing the 3,000 units of output?
Based on the data, what conclusion can you draw about the effect of process innovation on economic efficiency?
Explanation / Answer
Total cost of capital = $4000; Price paid for labour= $20 per unit and price paid for raw materials= $8per unit.
Answer a.
Total cost = Fixed cost + labout cost + Raw material cost = 4000+(200*20)+(500*8) = 4000+4000+4000 =$12000.
Average Total cost = Total cost / units produced = 12000/2000 = $6 per unit.
Answer b.
3000 units production
Total cost = Fixed cost + labout cost + Raw material cost = 4000+(100*20)+(500*8) = 4000+2000+4000 =$10,000.
Average Total cost = Total cost / units produced = 10,000/3000 = $3.33 per unit
As clearly seen in the above example process innovation has a positive impact on both the efficiency as well as the cost of production. Here process innovation increased efficiency by 150% at the same time cost pr unit has also reduced due to less labour cost and increased production which reduced fixed cost per unit.
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