According to The Wall Street Journal, Mitsubishi Motors recently announced a maj

Question

According to The Wall Street Journal, Mitsubishi Motors recently announced a major restructuring plan in an attempt to reverse declining global sales. Suppose that as part of the restructuring plan Mitsubishi conducts an analysis of how labor and capital are used in its production process. Prior to restructuring Mitsubishis marginal rate of technical substitution is 0.17 (in absolute value). To hire workers, suppose that Mitsubishi must pay the competitive hourly wage of 1,470. In the study of its production process and markets where capital is procured, suppose that Mitsubishi determines that its marginal productivity of capital is 0.65 small cars per hour at its new targeted level of output and that capital is procured in a highly competitive market. The same study indicates that the average selling price of Mitsubishis smallest car is 1,200,000. Determine the rate at which Mitsubishi can rent capital and the marginal productivity of labor at its new targeted level of output.

Rental Rate of Capital:

Marginal Productivity of Labor:

To Minimize the Costs Mistubishi shoudl hire capital and labor until the margin rate of techinal subsitituion reaches what portion?

Explanation / Answer

MRTS= dk/dl=MPL/MPk= w/v (in case of cost minimization)

0.17=w/v

1470/0.17=v

8647.05=v= rental rate of capital

For Marginal Productivity of labor

w/v=MPL/MPK

0.17*0.65=MPL=0.1105

To minimize cost Mistubishi should hire capital and labor until MRTS=w/v=dk/dl=MPL/MPK

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