If the shadow price of a given resource is $100 and the cost of expanding the capacity of that resource is $80 per unit, then the expansion of the capacity will:
A) earn positive profits.
B) earn zero profit, but the firm will stay in business.
C) temporarily earn negative profits.
D) not be a rational decision.
E) not affect the profit level.

Question

Quizplus · Accepted Answer

The shadow price of $100 indicates that the market is willing to pay up to $100 for each additional unit of the resource. Therefore, expanding the capacity by adding units of the resource at a cost of $80 per unit will allow the firm to sell additional units at a price of $100, resulting in a profit of $20 per unit. Thus, expanding the capacity will earn positive profits.

If the Shadow Price of a Given Resource Is $100