Concept explainers
Subpart (a):
The best production technique.
Subpart (a):
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 5 units of output and thus each are equally productive. When the cost structure is analyzed, the technique 2 is the least cost combination ($13 compared to the $15 each under the technique 1 and technique 3). The technique 2 produces the output (5 units) similar to other two techniques and at a least cost of production ($13).
When the price of the soap bar declines to $2.75, it affects the revenue of the firm but it does not affect the cost of the firm. The revenue of the firm at a new price level can be calculated as follows:
Thus, when the price decreases from $3 to $2.75, the revenue of the firm reduces to $13.75 from $15 but not the cost. Thus, the firm will continue to use the least cost combination of production, which is the technique 2 which provides the minimum profit to the firm with a low cost.
When there is an increase in price to $4 from $3, the revenue of the firm increases, but it does not affect the cost of the production. Thus, the firm will continue its production at the least cost combination and make use of the higher prices to increase the profit margin of the firm. Since, the technique 2 remains as the least cost combination production technique, the firm will continue its production using technique 2.
Similarly, when the price increases further to $5, the least cost production will help the business owners to maximize their profit margin which will lead to use the technique 2 for the production.
Concept introduction:
Production technique: The production technique can be considered as the arrangement of the factors of production and the resources involved into the production of the consumer goods in such a way that it minimizes the cost of production and maximizes the profit maintaining a better work flow.
Subpart (b):
The number of bar soaps produced at $2 price.
Subpart (b):
Explanation of Solution
The total cost of production in the least cost combination of production is $13 which is under the technique 2. When the price falls from $3 to $2, the total revenue of the firm can be calculated as follows:
Thus, the total revenue of the firm is lower than the total cost incurred by the firm in production. When the total revenue is lower than the cost of production, then, the firm will face the loss and thus, it is not profitable to carry on the production using any of the techniques at the price level of $2 per soap bar.
Concept introduction:
Profitability of production: The profitability of production takes place when the total revenue is greater than the total cost of the production. The difference between the total revenue and the total cost in this situation is known as profit. When the total cost is higher than the total revenue, then the difference between the total cost and the total revenue is known as loss.
Subpart (c):
The Least profitable combination of production at price of $1 for each input.
Subpart (c):
Explanation of Solution
When the cost of production changes with per unit change in the price of the inputs, it will lead to the profitability of each production technology to change. When the price of each unit of factor declines to $1, we can calculate the total cost of production under each production technique as follows:
|
Resources |
Price per unit of Resource | ||||||
| Technique 1 | Technique 2 | Technique 3 | |||||
| Units | Cost | Units | Cost | Units | Cost | ||
| Labor | $1 | 4 | $4 | 2 | $2 | 1 | $1 |
| Land | 1 | 1 | 1 | 3 | 3 | 4 | 4 |
| Capital | 1 | 1 | 1 | 1 | 1 | 2 | 2 |
| Entrepreneurial ability | 1 | 1 | 1 | 1 | 1 | 1 | 1 |
| Total cost of $15 worth bar soap | $7 | $7 | $8 | ||||
From the table above, it can be easily identified that the technique which incurs high cost of production will be the least profitable combination. Here, technique 3 incurs a high price of production when each factor has a price of $1 in the economy.
Concept Introduction:
Profitability of production: The profitability of production takes place when the total revenue is greater than the total cost of the production. The difference between the total revenue and the total cost in this situation is known as profit. When the total cost is higher than the total revenue, then the difference between the total cost and the total revenue is known as loss.
Subpart (d):
The Least profitable combination of production at price of $1 for each input.
Subpart (d):
Explanation of Solution
When the new production method which gives 3 units of output is introduced at the normal level prices of the factors of production which uses one unit of each factors of production, the cost and revenue of using the new production technique can be calculated as follows:
The cost of production technique can be calculated as follows:
|
Resource |
Price per unit of resource |
Technique 4 | |
|
Unit |
cost | ||
| Labor | $2 | 1 | $2 |
| Land | 1 | 1 | 1 |
| Capital | 3 | 1 | 3 |
| Entrepreneurial ability | 3 | 1 | 3 |
| Total cost of $15 worth bar soap | $9 | ||
Thus, from the above calculations, we can easily summarize that the new production technique involves the total cost of $9 and the total revenue of $9. . Thus, there is no economic profit for the firm to carry on its production using the technique 4. But the use of the technique 2 provides the firm with economic profit and thus, the firm will continue its production using the technique 2.
Concept Introduction:
Profitability of production: The profitability of production takes place when the total revenue is greater than the total cost of the production. The difference between the total revenue and the total cost in this situation is known as profit. When the total cost is higher than the total revenue, then the difference between the total cost and the total revenue is known as loss.
Want to see more full solutions like this?
Chapter 2 Solutions
MACROECONOMICS W/CONNECT
- When the price of a good or a service increases, _______? Group of answer choices The demand curve shifts in the same direction. The supply curve shifts in the opposite direction. The demand curve shifts in the opposite direction. There is a movement along the demand curve.arrow_forwardA foreign country to which we export but from which we do not import would do ______ according the Circular Flow Diagram? Group of answer choices Sell and Buy (or Rent). Sell, but does not buy. Buys, but does not sell. Does not sell nor buys.arrow_forwardNot use ai pleasearrow_forward
- After the holiday season, many of us find ourselves thinking, “What will I do with another case for my iPad?” Often, both the gift giver and gift receiver could be made better off (that is, receive a higher level of utility or happiness) if cash had been given instead. To understand the economic rationale behind this, economists turn to the basic consumer theory model of budget constraints and indifference curves. Recall that an indifference curve maps out all possible consumption bundles of goods that yield the same level of utility to a given consumer. Indifference curves tell us nothing about what we can afford, but rather tell us how happy a particular bundle will make us. On the other hand, a budget constraint shows the consumption bundles that we can buy given our income and the prices of goods. Similarly, a budget constraint says nothing about what we would like to buy, but rather what we can afford. Suppose you consume only two types of goods: magazines and food. You have $300…arrow_forwardCho is a truck driver living in Miami who performs freelance health consulting to supplement her normal income. At an hourly wage rate of $45, she is willing to consult 5 hours per week. Upping the wage to $65 per hour, she is willing to consult 14 hours per week. Using the midpoint method, the elasticity of Cho’s labor supply between the wages of $45 and $65 per hour is approximately , which means that Cho’s supply of labor over this wage range is .arrow_forwardWhere do I draw the demand and supply linearrow_forward
- It would be inefficient but possible for this economy to produce? 100 1dryers 90 80 C 70 A 60 50 D B 40 30 20 10 10 20 30 40 50 60 70 80 washers O 90 dryers and 20 washers. 50 dryers and 50 washers. O Two of the answers are correct. O 60 dryers and 20 washers.arrow_forwardignore what i put and find the correct answerarrow_forwardA foreign country to which we export but from which we do not import would _____ according the Circular Flow Diagram? • Sell and Buy (or Rent). • Does not sell nor buys. • Sell, but does not buy. • Buys, but does not sell.arrow_forward
- For a certain health insurance policy, losses are uniformly distributed on the interval [0, b].The policy has a deductible of $180 and the expected value of the non-reimbursed portionof a loss is $144. Calculate barrow_forwardfacebook (not Mark Zuckerberg) would do which action according the Circular Flow diagram? Buys, but does not sell. Does not sell nor buys. Sell, but does not buy. Sell and Buy (or Rent).arrow_forwardIt would be impossible for this economy to produce? dryers 100 90 C 80 70 A 60 50 D B 40 30+ 20- 10 10 20 30 40 50 60 70 80 OD C OA B washers 13arrow_forward
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning