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# The table below contains information on three techniques for producing \$15 worth of bar soap. Assume that we said "\$17.50 worth of bar soap" because...

The table below contains information on three techniques for producing \$15 worth of bar soap. Assume that we said “\$17.50 worth of bar soap” because soap cost \$3.50 per bar and all three techniques produce 5 bars of soap (\$17.50 = \$3.50 per bar 2formula3.mml 5 bars). So you know each technique produces 5 bars of soap.

Units of Resource
Price per Unit
of Resource
Technique
1 Technique
2 Technique
3
Resource 0 Units Cost Units Cost Units Cost
Labor \$2 4 \$8 2 \$4 1 \$2
Land 1 1 1 3 3 4 4
Capital 3 1 3 1 3 2 6
Entrepreneurial ability 3 1 3 1 3 1 3
Total cost of \$15 worth of bar soap 0 0 \$15 0 \$13 0 \$15

a. What technique will you want to use if the price of a bar of soap falls to \$3.25?

What technique will you want to use if the price of a bar of soap rises to \$4.75?

What technique will you want to use if the price of a bar of soap rises to \$5.75?

b. How many bars of soap will you want to produce if the price of a bar of soap falls to \$2.45?
Zero—it is not profitable to produce bars of soap at this selling price
Five—it is profitable to produce bars of soap at this selling price

c. Suppose that the price of soap is again \$3.50 per bar but that the prices of all four resources are now \$1.3 per unit. Which is now the least-profitable technique?

d. If the resource prices return to their original levels (the ones shown in the table) but a new technique is invented that can produce 2.57 bars of soap using 1 unit of each of the four resources, will firms prefer the new technique?

No
Yes

## This question was asked on Apr 18, 2012.

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