Question

Peerless Manufacturing is a profit-maximizing firm and, operating at capacity, it can produce 50 units of output per production period using any one of the following techniques of production. The market price of land, labor, capital are $5, $4, $6, respectively. And the profit associated with T1 is $124.

TECHNIQUE	T1	T2	T3	T4
LAND	8	8	8	8
LABOR	16	18	20	22
CAPITAL	12	8	6	3

4. The price of a unit of output is _______.
5. If this firm uses T2 it will realize a profit of _______.
6. If this firm uses T3 it will realize revenue of ______.
7. If this firm uses T4 it will realize a profit of _______.
8. The technique that minimizes the cost of production is _______.
9. If the market price of labor increases to $5, ceteris paribus, then the technique that maximizes profit is

Answer 1

(1)

Cost of T1 = 5 x 8 + 4 x 16 + 6 x 12 = 40 + 64 + 72 = 176

Revenue (TR) = Cost + Profit = 176 + 124 = 300

Since TR = P x Q,

P = TR / Q = 300 / 50 = $6

(2)

Cost of T2 = 5 x 8 + 4 x 18 + 6 x 8 = 40 + 72 + 48 = 160

TR = 6 x 50 = 300

Profit of T1 = TR - Cost = 300 - 160 = $140

(3)

With T3, Revenue = 6 x 50 = $300

(4)

Cost of T4 = 5 x 8 + 4 x 22 + 6 x 3 = 40 + 88 + 18 = 146

TR = 6 x 50 = 300

Profit of T4 = TR - Cost = 300 - 146 = $154

(5)

Cost of T3 = 5 x 8 + 4 x 20 + 6 x 6 = 40 + 80 + 36 = 156

So, total cost is minimized (= 146) ith T4.

(6)

Profit is maximized when Cost is minimized.

Cost of T1 = 5 x 8 + 5 x 16 + 6 x 12 = 40 + 80 + 72 = 192

Cost of T2 = 5 x 8 + 5 x 18 + 6 x 8 = 40 + 90 + 48 = 178

Cost of T3 = 5 x 8 + 5 x 20 + 6 x 6 = 40 + 100 + 36 = 176

Cost of T4 = 5 x 8 + 5 x 22 + 6 x 3 = 40 + 110 + 18 = 168

Profit is maximized (cost is minimized) with T4.