Chapter 2, Problem 4RQ

Subpart (a):

To determine

The best production technique.

Explanation of Solution

The production technique is the allotment and arrangement of the economic resources as well as the other goods and services into the production of the consumer goods and services which optimizes the cost and allocates the resources in an efficient manner. In this case, each of the production technique produces $40 worth units of output and thus each are equally productive. Thus, the choice between the production techniques can be made on the basis of the total cost of production. The cost structure can be calculated as follows:

Resources	Price per unit of Resource
		Technique 1		Technique 2		Technique 3
		Units	Cost	Units	Cost	Units	Cost
Labor	$3	5	$15	2	$6	3	$9
Land	$4	2	$8	4	$16	2	$8
Capital	$2	2	$4	4	$8	5	$10
Entrepreneurial ability	$2	4	$8	2	$4	4	$8
Total cost of $40 worth product			$35		$34		$35

The firm will always try to minimize its cost of production. Thus, when there are three equally productive techniques available with the firm, the firm will opt for the technique which has the least cost combination. Here, technique 2 is the least cost combination. Thus, the firm will choose technique 2 for the production.

Since, the total cost of production is $34 and the total revenue for the firm is $40, there is economic profit for the firm. The economic profit can be calculated by subtracting the total cost from the total revenue as follows:

$\begin{array}{c}\text{Economic Profit of the firm}=\text{ Total Revenue}-\text{Total Cost}\\ =40-34\\ =6\end{array}$

Thus, there is a profit of $6 to the firm while choosing technique 2 for its production.

When there is economic profit, the firm will expand and the expansion will take place only until when there is economic profit. When the total cost and the total revenue becomes equal, the expansion will come to an end.

Economics Concept Introduction

Concept introduction:

Production technique: The production technique can be considered as the arrangement of the factors of production and the resources into the production of the consumer goods in such a way that it minimizes the cost of production and maximizes the profit from the production and maintains the work flow of the business.

Subpart (b):

To determine

The choice of new technique of production.

Explanation of Solution

The introduced production technique 4 uses 2 units of labor, 2 units of land, 6 units of capital and 3 units of entrepreneurial ability respectively. Thus, the total cost of the new production technique can be calculated as follows:

Resource	Price per unit of resource	Technique 4
		Unit	cost
Labor	$3	2	$6
Land	$4	2	$8
Capital	$2	6	$12
Entrepreneurial ability	$2	3	$6
Total cost of $40 worth product			$32

Since, the total cost of production using the technique 4 is lower than the total cost of production of all other three techniques of production, the firm will choose the technique 4 as the production technique.

Economics Concept Introduction

Concept introduction:

Production technique: The production technique can be considered as the arrangement of the factors of production and the resources into the production of the consumer goods in such a way that it minimizes the cost of production and maximizes the profit from the production and maintains the work flow of the business.

Subpart (c):

To determine

The Least cost combination of production technique.

Explanation of Solution

When the price of labor falls from $3 to $1.5, it will change the total cost of production of all the production techniques available with the firm. Thus, the new cost structures of the production techniques of the firm can be calculated as follows:

Resources	Price per unit of Resource
		Technique 1		Technique 2		Technique 3
		Units	Cost	Units	Cost	Units	Cost
Labor	$1.5	5	$7.5	2	$3	3	$4.5
Land	$4	2	$8	4	$16	2	$8
Capital	$2	2	$4	4	$8	5	$10
Entrepreneurial ability	$2	4	$8	2	$4	4	$8
Total cost of $40 worth product			$27.5		$31		$30.5

From the table above, it can be easily identify that the technique which incurs lower cost of production will be the least cost combination. Here, it is the technique 1 which incurs lower price of production when price of labor decreases to $1.5 from $3. Thus, the firm will choose production technique 1.

Economics Concept Introduction

Concept Introduction:

Production technique: The production technique can be considered as the arrangement of the factors of production and the resources into the production of the consumer goods in such a way that it minimizes the cost of production and maximizes the profit from the production and keeps the work flow of the business.

Subpart (d):

To determine

The best production technique.

Explanation of Solution

When the resources become scarce, it will lead to the mismatch between the demand and supply of the resources. As a result of the shortage of the resources, the higher demand will increase the price of the resource.

When the firms are not considering the price of the resources, then the cost of production of the firms will increase. The firms who use the lower price resources become the lower cost producers. The profit of the lower cost producers will be higher.

Thus, the market structure forces the firms to conserve on the use of the highly scarce resources.

Economics Concept Introduction

Concept Introduction:

Scarcity of Resources: It is the state in which there is a shortage of the resources or there is no adequate quantity of resources available to meet the demand.