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Economics Chapter 2: Market Techniques

The document presents worked problems from Chapter 2 of the Economics (McConnell) AP Edition, focusing on the market system and circular flow. It details a problem involving the least-cost production of wool blankets using various techniques and resource prices, analyzing profitability and changes in production techniques based on cost fluctuations. The document concludes with a comparison of production costs under different scenarios, illustrating the decision-making process for firms in an economic context.

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16 views2 pages

Economics Chapter 2: Market Techniques

The document presents worked problems from Chapter 2 of the Economics (McConnell) AP Edition, focusing on the market system and circular flow. It details a problem involving the least-cost production of wool blankets using various techniques and resource prices, analyzing profitability and changes in production techniques based on cost fluctuations. The document concludes with a comparison of production costs under different scenarios, illustrating the decision-making process for firms in an economic context.

Uploaded by

Engr saqib
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

2/13/25, 2:02 PM Worked Problems

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Economics (McConnell) AP Edition, 19th Edition


Chapter 2: The Market System and the Circular Flow

Worked Problems
Problem 2.1 - Least-cost production

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

Problem: Answer:

Suppose there are three techniques for producing 1 wool a. The firm will choose technique 2. Its land cost is $2x2 =
blanket, as shown in the table above. $4, its labor cost is $4x2 = $8, its capital cost is $3x2 =
$6, and the cost of its entrepreneurial ability is $5x1 =
a. With the resource prices shown, which production $5, for a total cost of $4 + $8 + $6 + $5 = $23. By
technique will the firm use? Why? comparison, each of the other techniques have a total
b. Suppose the firm can sell blankets for $26 each. Will the cost of $24.
firm be profitable? b. Yes—If each blanket sells for $26 and can be produced
c. Assume a new technique, call it Technique 4, is at a total cost of $23, the firm will make $3 profit on each
developed that economizes on the relatively expensive one.
labor. It requires 2 units of land, 1 unit of labor, 3 units of c. Yes—The cost of producing a blanket would fall to $2x2
capital, and 1 unit of entrepreneurial ability. Will the firm + $4x1 + $3x3 + $5x1 = $22. This is $1 cheaper than its
adopt this new technique? current production technique.
d. Suppose the firm's cost of capital rises to $5, all other d. Technique 1 is now cheapest, with a total cost of $26. By
values being the same. Which technique will the firm contrast, Techniques 2, 3 and 4 now cost $27, $30, and
now choose? $28, respectively.

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