There are two concepts of Efficiency - Technological Efficiency (TE) and Economic Efficiency (EE). Technological Efficiency occurs when it is not possible to increase output without increasing inputs. Economic Efficiency occurs when the cost of producing a given output is as low as possible. TE is an engineering matter; EE depends on the prices of productive resources. Suppose there are 4 different methods for making TV sets - a) Robot production: One person monitors the entire computer driven process b) Production Line: Workers specialize in a small part of the job as the emerging TV set passes them on a production line. c) Bench Production: Workers specialize in a small part of the job but walk from bench to bench to perform their tasks. d) Hand-tool production: A single worker crafts the whole TV set with a few hand-tools.

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There are two concepts of Efficiency - Technological Efficiency (TE) and Economic
Efficiency (EE). Technological Efficiency occurs when it is not possible to increase output
without increasing inputs. Economic Efficiency occurs when the cost of producing a
given output is as low as possible. TE is an engineering matter; EE depends on the prices
of productive resources.
Suppose there are 4 different methods for making TV sets -
a) Robot production: One person monitors the entire computer driven process
b) Production Line: Workers specialize in a small part of the job as the emerging TV set
passes them on a production line.
c) Bench Production: Workers specialize in a small part of the job but walk from bench to
bench to perform their tasks.
d) Hand-tool production: A single worker crafts the whole TV set with a few hand-tools.
The following table sets out the amount of labor and capital required to make 10 TV sets
in a day.
Table 1: 4 Ways of Making 10 TV sets
Quantities of Input
K
Method
L
a. Robot Production
1
b. Production Line
10
c. Bench Production
100
d. Hand-tool production 1,000
1,000
10
10
1
I. Are all of these alternative methods technologically efficient? Why or Why not?
II. Now let us check for economic efficiency - Suppose Labor Costs are $ 75 per person-
day, and capital costs $250 per machine-day. Create a new table and calculate the
associated labor costs, capital costs, total costs and cost per TV set (Average Total Cost)
for each of the production alternatives. Which method is now the most economically
efficient?
III. Now suppose Labor costs are $ 150 per day and Capital costs are $ 1 per day. Go
through the same exercise and calculate the associated labor costs, capital costs, total costs
and cost per TV set (Average Total Cost) for each of the production alternatives. Which
method is now the most economically efficient?
IV. Finally, if we were to out-source productions to an offshore facility where labor costs
are just $ 1 per day, and capital costs are $1,000 per day. Calculate the associated labor
Transcribed Image Text:There are two concepts of Efficiency - Technological Efficiency (TE) and Economic Efficiency (EE). Technological Efficiency occurs when it is not possible to increase output without increasing inputs. Economic Efficiency occurs when the cost of producing a given output is as low as possible. TE is an engineering matter; EE depends on the prices of productive resources. Suppose there are 4 different methods for making TV sets - a) Robot production: One person monitors the entire computer driven process b) Production Line: Workers specialize in a small part of the job as the emerging TV set passes them on a production line. c) Bench Production: Workers specialize in a small part of the job but walk from bench to bench to perform their tasks. d) Hand-tool production: A single worker crafts the whole TV set with a few hand-tools. The following table sets out the amount of labor and capital required to make 10 TV sets in a day. Table 1: 4 Ways of Making 10 TV sets Quantities of Input K Method L a. Robot Production 1 b. Production Line 10 c. Bench Production 100 d. Hand-tool production 1,000 1,000 10 10 1 I. Are all of these alternative methods technologically efficient? Why or Why not? II. Now let us check for economic efficiency - Suppose Labor Costs are $ 75 per person- day, and capital costs $250 per machine-day. Create a new table and calculate the associated labor costs, capital costs, total costs and cost per TV set (Average Total Cost) for each of the production alternatives. Which method is now the most economically efficient? III. Now suppose Labor costs are $ 150 per day and Capital costs are $ 1 per day. Go through the same exercise and calculate the associated labor costs, capital costs, total costs and cost per TV set (Average Total Cost) for each of the production alternatives. Which method is now the most economically efficient? IV. Finally, if we were to out-source productions to an offshore facility where labor costs are just $ 1 per day, and capital costs are $1,000 per day. Calculate the associated labor
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