Question

Ignoring hedonic pricing considerations in input(s) and output(s) and

also ignoring dynamics, consider the ONE-OUTPUT and ONE-INPUT case

in which BOTH the output and input markets operate under perfectly

competitive market structures. Please analyze the following situation. First,

let’s assume that using some “old” technology (of course assuming constant

input and output prices, because of the existence of perfectly competitive

markets structures in the input and output markets) you derive the optimal

level of input use to be X* [of course given by the equation where VMPx =rx,,

where VMPx is equal to (Py) (MPPx)]. Now assume that there is a “new”

technology which shifts up in a parallel manner the entire production

function (i.e., the production function ships UP proportionally no changing

its slope all the way through all levels of X, meaning that with the “new”

technology when compared to the “old” technology a higher level of output

will result at all levels of input use). Question (5.a) Will the “new” level of

input use be higher, lower, or remain the same with the “new” technology

when compared to the “old” technology, elaborate in detail? Question (5.b)

What would be the highest amount of money a decision maker facing the

adoption or no-adoption of the “new” technology be willing to pay for the

“new” technology?

Answer 1

Question (5.a) Will the "new" level of input use be higher, lower, or remain the same with the "new" technology when compared to the "old" technology, elaborate in detail?

• Since this "new" teachnology is able to shift up in a parallel manner the entire production function compared to the "old" technology, it is expected that this "new" level of input will be higher than the "new" technology when compared to the "old" technology.

Question (5.b) What would be the highest amount of money a decision maker facing the adoption or no-adoption of the "new" technology be willing to pay for the "new" technology?

• It actually depends on how much the decision maker is willing to pay. There is no clear-cut amount for this case.