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

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 Mitsubishi’s marginal rate of technical substitution is 0.15 (in absolute value). To hire workers, suppose that Mitsubishi must pay the competitive hourly wage of ¥1,670. In the study of its production process and markets where capital is procured, suppose that Mitsubishi determines that its marginal productivity of capital is 0.6 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 Mitsubishi’s smallest car is ¥1,250,000. Determine the rate at which Mitsubishi can rent capital and the marginal productivity of labor at its new targeted level of output.

Find the following (to 4 decimal places).

Rental rate of Capital? * I found this to be 750,000 *

Marginal productivity of labor?

To minimize costs Mitsubishi should hire capital and labor until the marginal rate of technical substitution reaches what proportion?

Explanation / Answer

MRTSLK = - MPL/MPK

0.15 = - MPL/ 0.6

MPL= 0.09

FOR RENTAL RATE OF CAPITAL, r

for producing at minimum cost MRTSLK = w/r

                                               0.15= 1670/r

                                             r= 11133.3333

to minimise cost Mitsubishi should hire capital and labour until the marginal rate of technical substitution reaches the ratio w/ r or slope of isocost line

where

MRTSLK = w/r

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