There are two concepts of Efficiency - Technological Efficiency (TE) and Economic Efficiency (EE). Technological Efficiency occurs when it is not possible to increase output without increasing inputs. Economic Efficiency occurs when the cost of producing a given output is as low as possible. TE is an engineering matter; EE depends on the prices of productive resources. Suppose there are 4 different methods for making TV sets - a) Robot production: One person monitors the entire computer driven process b) Production Line: Workers specialize in a small part of the job as the emerging TV set passes them on a production line. c) Bench Production: Workers specialize in a small part of the job but walk from bench to bench to perform their tasks. d) Hand-tool production: A single worker crafts the whole TV set with a few hand-tools. The following table sets out the amount of labor and capital required to make 10 TV sets in a day. Table 1: 4 Ways of Making 10 TV sets Method Quantities of Input L K a. Robot Production 1 1,000 b. Production Line 10 10 c. Bench Production 100 10 d. Hand-tool production 1,000 1 I. Are all of these alternative methods technologically efficient? Why or Why not? II. Now let us check for economic efficiency - Suppose Labor Costs are $ 75 per person- day, and capital costs $ 250 per machine-day. Create a new table and calculate the associated labor costs, capital costs, total costs and cost per TV set (Average Total Cost) for each of the production alternatives. Which method is now the most economically efficient? III. Now suppose Labor costs are $ 150 per day and Capital costs are $ 1 per day. Go through the same exercise and calculate the associated labor costs, capital costs, total costs and cost per TV set (Average Total Cost) for each of the production alternatives. Which method is now the most economically efficient? IV. Finally, if we were to out-source productions to an offshore facility where labor costs are just $ 1 per day, and capital costs are $ 1,000 per day. Calculate the associated laborD). Justify whether these statements are True or False. A very brief explanation substantiated with pictures (where possible) is necessary. i) In Perfect Competition, each and every firm in the market or industry can be price setters. ii) In Perfect Competition, since the equilibrium profit maximizing condition is "P =MC", in the Short Run the firm's supply curve is nothing but the entire Marginal Cost Schedule.costs, capital costs, total costs and cost per TV set (Average Total Cost) for each of the production alternatives. Which method is now the most economically efficient? V. Based on parts II-IV, what can you generally say about the relationship between Technological Efficiency and Economic Efficiency? Question III (10 Points) There is a particular production enterprise, "Clothes "R" US" where you are combining labor and capital to produce textiles. In the short run, you may assume that capital is fixed. i) On a picture, draw hypothetical Average and Marginal Product Curves for Labor. Label the axes. What do you understand about the Law of Diminishing Returns as it relates to the shape of the MP curve? ii) The firm uses input to produce textiles and in the process incurs costs. Draw standard ATC and MC curves. What is the connection between the productivity curves that you have drawn in (i) and the cost (ATC and MC) curves? iii) Suppose in the Long Run, or the planning period, all inputs are variable (including the decision to close down the business)-- What is the relation between Returns to Scale (or Economies of Scale) and the various stages of the Long Run Average Total Cost curve? iv) As an economic analyst, you have access to all the Cost numbers. Suppose you were to define a "Cost Elasticity of Output" (EC), as a measure of how responsive your costs are to output expansion, what would that formula look like, and what would the relevant values for EC be for the various stages of the Long Run Average Cost Curve? v) As you become well versed in the production of textiles, you realize that production is 'lumpy' or 'indivisible'; i.e., average costs for small ranges of output do not change. How does this change the shape/slope of the Average Cost Curve? * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X XXXXXXXX