Doran Company produces a product that uses two inputs, energy and labor. During the past month, 40 units of the product were produced, requiring 32 units of energy and 128 hours of labor. An engineering study revealed that Doran can produce the same output of 40 units using either of the following two combinations of inputs:

Energy Labor Combination A 20 80 Combination B By 50 Energy costs $12 per unit used; the cost of labor is $10 per hour.

Required:

1. Calculate the output/input ratio for each input of Combination A. Does this represent a productivity improvement over the current use of inputs? What is the total dollar value of the improvement? Classify this as technical or price efficiency improvement.

2. Calculate output/input ratios for each input of Combination B. Does this represent a productivity improvement over the current use of inputs? Now compare these ratios to those of Combination A. What has happened?

3. Compute the cost of producing the 20 units of output using Combination B.

Compare this to the cost using Combination A. Does moving from Combination A to Combination B represent a productivity improvement? Explain.