4. Techniques of Production
Resource Resource Prices
Land $4
Labor $2
Capital $5
Entrepreneurial Ability $3
Possible ProductionTechniques
I II III IV
4 6 8 9
6 7 9 9
5 4 3 2
1 1 1 2
a. Which technique is the most efficient?
b. If the most efficient technique is used and the product produced is sold for $70, what will be the economic profit or loss?
To determine the most efficient technique of production and calculate the economic profit or loss, we need to consider the concept of cost and compare it to the revenue generated from selling the product.
a. To determine the most efficient technique, we can use the concept of production costs, specifically the concept of Total Cost (TC) and Marginal Cost (MC).
For each production technique, we need to calculate the Total Cost (TC) and Marginal Cost (MC).
Total Cost (TC) can be calculated by multiplying the resource prices by the quantity of each resource used in the production technique.
Technique I:
TC = (4 * $4) + (6 * $2) + (8 * $5) + (9 * $3) = $16 + $12 + $40 + $27 = $95
Technique II:
TC = (6 * $4) + (7 * $2) + (9 * $5) + (9 * $3) = $24 + $14 + $45 + $27 = $110
Technique III:
TC = (8 * $4) + (9 * $2) + (3 * $5) + (1 * $3) = $32 + $18 + $15 + $3 = $68
Technique IV:
TC = (9 * $4) + (9 * $2) + (2 * $5) + (2 * $3) = $36 + $18 + $10 + $6 = $70
Now, to determine the Marginal Cost (MC), we calculate the change in Total Cost (TC) for each additional unit produced.
Technique I:
MC = TC(6 units) - TC(4 units) = $152 - $95 = $57
Technique II:
MC = TC(7 units) - TC(6 units) = $157 - $110 = $47
Technique III:
MC = TC(9 units) - TC(8 units) = $96 - $68 = $28
Technique IV:
MC = TC(9 units) - TC(8 units) = $76 - $70 = $6
The most efficient technique of production is the one with the lowest Marginal Cost (MC). In this case, Technique IV has the lowest MC of $6, making it the most efficient technique.
b. To calculate the economic profit or loss, we need to compare the revenue generated from selling the product with the Total Cost (TC) of the most efficient technique.
Given that the product is sold for $70 and the TC for Technique IV is $70, the economic profit or loss can be calculated as follows:
Economic profit = Revenue - Total Cost
= $70 - $70
= $0
Therefore, in this scenario, there will be no economic profit or loss when the most efficient technique (Technique IV) is used and the product is sold for $70.