Question

nt Assume the firm finds that its profit will be at maximum when it produces $400 worth of product A. Suppose also that each of the two techniques shown in the following table will produce the desired output. If the company choose the most desirable technique, will the industry expand or contract? Price Resources Resource units required resources Technique Technique Technique Technique Labor Land Capital Entrepreneurial $2 $4 $3 $5 #1 50 20 20 40 #2 30 20 50 40 #3 40 30 30 50 #4 35 20 40 45 Expand O Contract O both either

Answer 1

		Resource unit required				Cost of technique
Resources	Price resources	Technique 1	Technique 2	Technique 3	Technique 4	Technique 1	Technique 2	Technique 3	Technique 4
Labor	2	50	30	40	35	100	60	80	70
Land	4	20	20	30	20	80	80	120	80
Capital	3	20	50	30	40	60	150	90	120
Entrepreneurial	5	40	40	50	45	200	200	250	225
						440	490	540	495

Calculation:

Cost of technique
Technique 1	Technique 2	Technique 3	Technique 4
2*50=100	2*30=60	2*40=80	2*35=70
4*20=80	4*20=80	4*30=120	4*20=80
3*20=60	3*50=150	3*30=90	3*40=120
5*40=200	5*40=200	5*50=250	5*45=225
100+80+60+200=440	60+80+150+200=490	80+120+90+250=540	70+80+120+225=495

Technique 1	440
Technique 2	490
Technique 3	540
Technique 4	495

The firm will choose Technique 1 because it produces the output at the least cost. (Compared to other techniques) Production using technique 1 will give loss, Since TC > TR

TR = $400

TC = $440

Loss = TC – TR = 440-400

Loss = $40

Loss will be $40, causing the industry to contract.

Answer: Contract