You were recently hired to replace the manager of the Roller Division at a major

Question

You were recently hired to replace the manager of the Roller Division at a major conveyor-manufacturing firm, despite the manager’s strong external sales record. Roller manufacturing is relatively simple requiring only labor and a machine that cuts and crimps rollers. As you begin reviewing the company’s production information, you learn that labor is paid $12 per hour and the last worker produced 80 rollers per hour. The company rents roller cutters and crimping machines for $15 per hour, and the marginal product of capital is 110 rollers per hour. What do you think the previous manager could have done to keep his job?

Explanation / Answer

Since MRTS KL w / r,

the firm was not using the cost minimizing combination of labor and capital. To achieve the cost minimizing combination of inputs, you should increase capital and decrease labor, since MPL/ w = 80/ 12 < MPK/ r = 110 / 15

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