Ch2. Market System and Circular flow

Q. 1.Problem 2.1 - Least-cost production

Resource

Price per Unit of Resource

Resources Required

Technique 1

Technique 2

Technique 3

Units

Units

Units

Land

$2

2

2

3

Labor

$4

3

2

1

Capital

$3

1

2

3

Entrepreneurial Ability

$5

1

1

1

Problem:

Suppose there are three techniques for producing 1 wool blanket, as shown in the table above.

1. With the resource prices shown, which production technique will the firm use? Why?
2. Suppose the firm can sell blankets for $26 each. Will the firm be profitable?
3. Assume a new technique, call it Technique 4, is developed that economizes on the relatively expensive labor. It requires 2 units of land, 1 unit of labor, 3 units of capital, and 1 unit of entrepreneurial ability. Will the firm adopt this new technique?
4. Suppose the firm's cost of capital rises to $5, all other values being the same. Which technique will the firm now choose?