1. The wage rate for all units of labor is $10/hr. You have spent $160,000 on de
ID: 1124229 • Letter: 1
Question
1. The wage rate for all units of labor is $10/hr. You have spent $160,000 on developing a production process (Process X) that will allow you to produce 8 units for every unit of labor. If you use this production process, the accounting profits will cover the initial investment within 6 months. If you use your normal production process (not Process X), you can produce 10 units for every unit of labor. Both processes are fully scalable, so the marginal product of labor is fixed for any reasonable amount of labor you could hire. Based on this information, what should you do?
a) switch to Process X
b) use only your normal production process
c) use Process X until you recover your costs, then switch to the usual process
d) use a combination of Process X and your normal process
2. For a given industry, what determines whether firms within that industry will generally be able to achieve economic profits?
a) growth in GDP
b) income of the consumer
c) market structure
d) size of the market
Explanation / Answer
1> b) use only your normal production process
Reason
In the normal process, the marginal product of labor is higher than the process X. So, it is better to go with the normal process.
2>c) market structure
reason
The profit level of a firm depends on the market structure of that product.
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