A firm is considering adopting a new, more efficient production technology. To evaluate the potential economic gain, it must compare the new technology's cost to a specific baseline. Match each description below to its correct role in this evaluation.
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A manufacturing firm currently uses the most cost-efficient production technique available in its industry, requiring 5 workers and 3 units of energy to produce one batch of goods. The firm develops a new, proprietary technique that reduces the inputs to 3 workers and 2 units of energy for the same output. To accurately calculate the additional profit (economic rent) the firm will earn by being the first to adopt this new technique, what is the correct baseline for comparison?
A company is evaluating a new, cost-saving production process. Before this innovation, the company and its competitors were all using the most efficient process available at the prevailing input prices. To accurately calculate the economic gain from being the first to adopt the new process, the company should compare the cost of the new process to the cost of any of the older, less efficient processes that were available but not chosen by any firm.
Calculating Gains from a New Production Method
Evaluating a Technology Upgrade
Evaluating a Cost-Saving Proposal
A firm is considering adopting a new, more efficient production technology. To evaluate the potential economic gain, it must compare the new technology's cost to a specific baseline. Match each description below to its correct role in this evaluation.
When a firm is the first to adopt a new, more efficient production process, the economic gain is calculated by comparing the new cost of production to the cost of the technology that was previously the ____ option at the original input prices.
Justifying the Baseline for Economic Gain
A firm produces widgets using two inputs: labor at $20 per hour and coal at $30 per ton. It is currently using the most cost-effective of three available production methods:
- Method X: Requires 2 hours of labor and 4 tons of coal.
- Method Y: Requires 4 hours of labor and 2 tons of coal.
- Method Z: Requires 3 hours of labor and 3 tons of coal.
The firm develops a new, proprietary method, 'Alpha,' which uses 3 hours of labor and 1 ton of coal. To accurately determine the economic gain per widget from being the first to adopt Method Alpha, what calculation should the firm perform?
Evaluating a Flawed Cost-Benefit Analysis