5. In 1999, the U.S. Bureau of Labor Statistics reported that hourly compensatio

Question

5. In 1999, the U.S. Bureau of Labor Statistics reported that hourly compensation costs per U.S. manufacturing workers were $19.20, while those in Mexico were $2.12. Recognizing that the analysis presented in class can be used to understand the choices firms make between any two factors of production, explain why a growing firm with facilities in both Mexico and the United States might still expand its output using U.S. workers. (Hint Consider U.S. and Mexican workers to be substitutes factors of production). (1 pt)

Explanation / Answer

Ans. That's a very interesting question , Let's start the answer:

This question can be very solved very easily by using the Ratio of Wages and Marginal Productivity Analysis. We know that , Hourly Compensation Cost of Workers in USA is $19.20 while in Mexico it's $2.12. Considering that US and Mexican workers to be substitute factors of production , Firms in Mexico and US may still expand its output using US workers. Now Why So ?

See , Main motive of the Firm is to Earn Maximum Profit. Now the firm would substitute the Mexican Workers and US workers as long as their ' Ratio of Wage to Marginal Productivity is equal ' . When this Ratio is lower in Mexico and Mexican workers are led productive , hiring the US workers ( who are more productive ) would still expand the output of the Firms. Hence the Main Focus is on the Productivity of the Worker.

If Productivity of a Worker is more and he is being paid more than the Worker whose productivity is less , Firms would usually prefer the Productive Worker.

I hope you understood the answer. Do ask in case of doubts.

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Best of Luck !! Keep Chegging !!

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