A firm that sells headphones at $5 the piece has two plants, one in San Diego (U

Question

A firm that sells headphones at $5 the piece has two plants, one in San Diego (US) and one in Tijuana (Mexico). Both plants make the same product but workers in Tijuana make $32 per day and workers in San Diego make $64 per day. Given current employment, the marginal product of the last worker in Tijuana is 150 units, and the marginal product of the last worker in San Diego is 200 units.

a) What are the Marginal Revenue Product values in Tijuana and San Diego?

b) Where the firm gets the most of its investment in labor? Why?

c) If you would be the manager of this firm, where would you add more workers? Why

Explanation / Answer

a) Marginal revenue product = Price*marginal physical product

         Tijuana = 150*5

                   = $750

San Diago = 200*5

                =$1,000

b) Marginal cost of employing worker is $32 at Tajuana and marginal revenue product is 750 (750- 32=718)

while in San diago $64 and $1,000 (1,000-64=936)

Firm get most of investment from San Diego

c) As a manager we would add worker at San Diego since it overall profit margin is high.

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