Question

1.1 Technological Revolution. Consider two technologies for producing 100 meters of cloth, C and D, as shown by the table below. The cost of each method depends on the prices of labor and coal. Number of Technology workers Tons of Coal Total Cost P1 P2 Under the set of prices in the first period (P1), the daily wage is £10 and the price of a ton of coal is £20. Under the set of prices in the second period (P2), the daily wage is £10 and the price of a ton of coal is £5. a. Calculate the cost of producing 100 meters of cloth using each Technology for both sets of prices. Fill in the table above. b. Draw a figure (similar to Figure 2.8 in the book) illustrating both technologies and 4 isocost curves, Costcapi, Costcap, Costpap, and Costpap2, Label all axes, intercepts, and curves. c. In perfect competition the price of a good will equal the costs of producing the good. With perfect competition what would be the price of 100 meters of cloth in Pl? d. If the price of labor and coal suddenly change to prices in P2, i how much temporary profit (or economic rent) will the first firm earn from switching from Technology C to Technology D? ii. What will happen to the price of cloth in P2 as every other firm switches to using Technology D? iii. What will happen to the first firm's profit? e. During the Industrial Revolution, firms shifted from using Technology C to using Technology D to produce cloth. Using the logic of these isocost curves and the information about historical prices from the textbook, why might British firms have been the first to adopt Technology D?

Answer 1

Total Cost Num of wookers Tons of Cool 8 1170 Izo 150 50 Total Cast : (number of cow Kens + erge )+ (tons of coal + Price of a tons of cond] In P... wages - Elo Poice of tons of Coal - E20 doo c : total cost = 6*10+ 2x20 = 60+40 = Eloo foo D i total cost - 1x10 + 8x20 10+60 - E170 daily wage = Elo Poice of a tons of Coal = E5 e

for c: Pobal Cost = 6+10+2x85 = 60+10 = E70 foo D: Total Cost = 1x10 + 8x5 = 10+40 - ESO Cost of tons of Coal 1401 130 1204 D@pi tool D@P2 Cost of labous 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 ic In Perfect In Pi, fox Competition, Price = cost Perfect Competition, the Poice of 100 melses of cloth is,

Poice , P = total cost = (nomber of workers wage) +(tons of Coal x cost of a ton of coal) with technology C, P = (6+10) + (2x 20) = 60+40 -Eloo with technology D, P = (1+10) + (8 +20) = 10+160 =E170 . d Price of labour and Coal changes to Poices in Pa i By Switching techboology D, the first from its technology c to total cost by, from redoces per loo 70-50 = E2o melse of cloth Pooduced. So, temposany Profit (oo economic Poosit) = Edo

i As every the Poice total cost other fism switches to using technology D, of cloth in Pa becomes equal to the used in producing the cloth I m As more & more fisms start using technology D, the from I can't make Supernoomal poofil (es economic poodit) as the Poice of cloth is deriven down to be equal to the total last. Since, only the total cost is being covered by Selling the cloth, there is no economic Poofit earned by the first Lions. The first fism cams normal Portils just like the other fisms that start using food technology D. As the Great Britain started the Industrial Revolution, British Signs got a chance to earn Supernosnal Possils (co economic Bend)Soper normal poodits attracted other firme to use technology D, and with time the Supenormal Poohit faded away.