Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table below will produce the desired output.



Resource Units Required
Resource Price per Unit of Resource Technique 1 Technique 2 Technique 3
Labor $ 3 5 2 3
Land 4 2 4 2
Capital 2 2 4 5
Entrepreneurial ability 2 4 2 4

a. With the resource prices shown, which technique will the firm choose?


Technique 2


Why?
multiple choice 2
This technique uses the most labor.
This technique uses the least capital.
This technique represents the least-cost combination.


Will production using that technique result in profit or loss?


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What will be the amount of that profit or loss?





Will the industry expand or contract?


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When will that expansion or contraction end?

multiple choice 5
It will end when labor costs become too high.
It will end when enough firms exit the market to increase economic profits to zero.
It will continue indefinitely.
It will end when enough firms enter the market to reduce economic profits to zero.


b. Assume now that a new technique, technique 4, is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. With the resources priced as shown in the table, will the firm adopt the new technique?


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c. Suppose that an increase in the labor supply causes the price of labor to fall to $1.50 per unit, all other resource prices remaining unchanged. Which technique will the producer now choose?


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d. Evaluate this statement: "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Does your answer to part c, above, bear out this contention?