Three companies produce an identical unit of output by using three different processes. These processes require the following inputs of labor, energy, and materials:
| Company | Labor, hours | Energy, units | Materials, units |
| Horatio Co. | 1 | 5 | 10 |
| Polonius Co. | 5 | 10 | 1 |
| Fortinbras Co. | 10 | 1 | 5 |
In 20X1, the wage rate for labor is $20 per hour, energy costs are $10 per unit, and material costs are $5 per unit. In 20X2, the wage rate for labor remains at $20 per hour, energy costs decrease to $5 per unit, and material costs increase to $15 per unit. The economically efficient producer in each year is:
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Horatio Company is the economically efficient producer in 20X1 because it has the lowest cost per unit of output:
In 20X2, as a result of changes in the input prices, Polonius Company is the economically efficient producer:
Horatio: (1 × $20) + (5 × $10) + (10 × $5) = $120 per unit of output
Polonius: (5 × $20) + (10 × $10) + (1 × $5) = $205 per unit of output
Fortinbras: (10 × $20) + (1 × $10) + (5 × $5) = $235 per unit of outputHoratio: (1 × $20) + (5 × $5) + (10 × $15) = $195 per unit of output
Polonius: (5 × $20) + (10 × $5) + (1 × $15) = $165 per unit of output
Fortinbras: (10 × $20) + (1 × $5) + (5 × $15) = $280 per unit of output
Ken Brobeck and Alice Magnuson are discussing the use of technology in production. They state the following:
Brobeck: If a firm has an opportunity to increase both its output and revenue by adopting new technology, it should do so.
Magnuson: If a production process is economically efficient, it must also be technologically efficient.
With respect to these statements:
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Brobeck is incorrect. A firm must incur costs to employ new technology. The firm should do so only if the additional revenue from adopting the technology is greater than the increase in costs. Magnuson is correct. A production process is technologically efficient if there is no process that uses less of one input without using more of another input to produce a particular level of output. A process is economically efficient if it produces a given output at the lowest possible cost. A process cannot be economically efficient unless it is technologically efficient.
Technological and economic efficiency are most accurately described by which of the following statements?
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Technological efficiency exists when the least amounts of possible inputs are used to produce a given level of output. Economic efficiency is producing a given output at the lowest possible cost.
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