A firm is pondering over the introduction of a new good with a profit contribution of $70 per unit.Each unit of the good uses 2 units of input A and 3 units of input B.The shadow price of A is $10,and the shadow price of input B is $15.Which of the following statements is true?
A)The firm should produce the new good.
B)The opportunity cost of producing the new good is $75.
C)The firm should not produce the new good.
D)Producing the new good will earn a profit of $10.
E)Producing the new good will earn a loss of $5.

Question

Quizplus · Accepted Answer

To determine whether the firm should produce the new good, we need to compare the profit contribution per unit with the total opportunity cost of producing the unit.

The opportunity cost of producing one unit of the new good is:

2 units of input A x $10 per unit = $20
3 units of input B x $15 per unit = $45
Total opportunity cost = $20 + $45 = $65

Since the profit contribution per unit is $70 and the opportunity cost is only $65, the firm should produce the new good. The profit per unit is higher than the opportunity cost per unit, and the firm will earn a profit. Therefore, the correct answer is A.

A Firm Is Pondering Over the Introduction of a New