Q. Total cost of Factor Combinations?
Here we try to find total cost of every factor combination and choose the one that has the least cost. Cost of every factor combination is found by multiplying the price of each factor by its quantity and then summing it for all inputs. This is explained in Table below.
Table: Choosing the Lowest Cost of Production Technique
|
Technique
|
Capital
(units)
|
Labour
(units)
|
Capital Cost
Rs.
|
Labour Cost
Rs.
|
Total Cost
Rs.
|
|
1
|
2
|
3
|
4
|
5
|
6
|
|
A
|
6
|
10
|
500*6=3000
|
400*10=4000
|
7000
|
|
B
|
2
|
14
|
500*2=1000
|
400*14=5600
|
6600
|
It is presumed that 100 pairs of shoes are produced per week and price of capital and wage of labour are 500$ and 400$ per week respectively. In order to make analysis, we presume that there are only two technically efficient methods of producing shoes and they are labelled A and B.
The table illustrates that total cost of producing 100 pairs of shoes is7000$ per week by using technique A and 6600$ per week using technique B. Firm will choose technique B that is an economically efficient (or lowest cost) production technique at the factor prices presumed in the above illustration.
If either of the factor prices alters equilibrium proportion of the factors would also change so as to use less of those factors which display a price rise. Consequently we will have a new optimal combination of factors. This can again be found out by calculating cost of different factor combinations with new factor prices and choosing the one which costs the least.