74. Assume that a firm finds that its profits will be maximized (or losses minim

Question

74. Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $30 worth of product X. Each of these techniques shown in the following table will produce exactly $30 worth of X. Unit resource prices S1 Method #1 Method #2 Method #3 Land Labor Capital Entrepreneurship 4 (a) Which method is most efficient? Why? (b) Given the above prices, will the firm adopt a new method which involves 10 units of land, 3 of labor, 2 of capital, and 2 of entrepreneurial ability? Why or why not? Suppose the price of capital falls to $1 without any other prices changing. Which of the methods will the firm now choose? Why?

Explanation / Answer

a) Since Method-1 uses relatively less of the more expensive resources, and relatively more of the least expensive resource, thus Method-1 is most efficient

(b) When firm adopt a new method it becomes the least-cost method thus should accept it

(c) When price of capital falls to $1 without any other prices changing, the firm will select Method-3 as it utilizes relatively more of capital which when price declines to $1 becomes much less expensive. Mow the total cost of each method makes Method-3 to be the least-cost combination

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.