Let's say the relative prices of input A change for a particular firm. Will a firm...
Let's say the relative prices of input A change for a particular firm. Will a firm switching to the new cost-minimizing technology have an advantage over its competitors? yes or no
Homework Answers
Answer: No.
Relative price is the ratio of prices of two alternatives. Suppose alternative A’s price is $10 and B’s price is $15. Relative price of A is ($15 / $10 =) 1.5 – it means the purchase of each B loses 1.5 times of A.
Now, suppose the price of B drops to $12 while A is unchanged. Relative price of A would be lower to as ($12 / $10 =) 1.2. Although the relative price drops, the firm should not go for B, since it is still costly because $12 is higher than $10.
Therefore, the cost minimizing input should not be chosen based on the relative price only. It doesn’t give advantage in competition.
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