Question

TIL U TVU , OUVOIIIIIIIIL LUULTUUVIL NO. Question 01: The Virtue of Free Markets: Review the three key questions all economies must answer from your student notes. The second question being "how will goods and services be produced?" In competitive markets, the answer is in such a way as to minimize the (per unit) cost. Assume a business Resource Price per Technique 1 Technique 2 has a small factory unit of which produces resource "widgets" which it Units Resource Units Resource can sell for $40 each Required Cost Required Cost Natural Resources $2.00 6 Two different Labor $4.00 2 4 techniques can be Capital $3.00 2 used to produce Entrepreneurship $1.00 these "widgets" as Total Cost $10.00 shown in the table to the right. 4 With the resource prices shown, which technique will the firm choose? Why? Will production using that technique earn a profit or losses? What will be the amount of that profit or loss? One textbook states in a market system, prices provide individuals for businesses!) the information they need to make decisions. Prices provide signals about the relative scarcity of a product for resourcel) and help an economy respond to scarcity." Resource Technique 1 Technique 2 Price per unit of resource Units Required Resource Cost Units Required Resource Cost Suppose there are fewer workers causing the price of labor to increase to $5.00 per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain 2 Natural Resources Labor Capital Entrepreneurship Total Cost $2.00 $5.00 $3.00 $1.00 I s11.00

Answer 1

Every firm consider the market prices and cost of producing that particulat good or service. Technique I Price per Unit of Resource resource cost (N.R) $2.00 $12 (L) $4.00 (k) $3.00 $12 (6) $1.00 $4 Total cost $36 Unit Required Resource cost = Price per unit of Resource x unit Required. Resources Total cost $36 Scanned with CamScanner

Technique I unit Resource cost Required | Price per Unit of resource INR) $2.00 Labour $4.00 1k ) $3.00 116) $1.00 Totalcost $8 $16 $6 $35 Total cost =$35 Both techniques with are profitable. But technique is more profitable. P Profit it = Revenue-cost Technique I = Price 40-36 = $4(profit] Technique II = 40-35=$5 (Profit] so producer prefer to use cs techniquetes CamScanner

If the price of labour rise to $5. Technique I 1 Technique II Price per unit Resource unit Resource unit of Required I cost Required 1 cost resource (N. R) $2.00 6 $12 -L) $5.00 $10 (k) $ 3.00 $12 le) $1.00 4 $4 $5 Total cost $38 $20 14. $39. T.I) cost of producing = $38 1. IT cost of producing = $39 Profit in Technique I = $2 Technique I = $1 So, producer preferito use setechnique 'I'. CamScanner