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 managers 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 $14 per hour and the last worker hired produced 110 rollers per hour. The company rents roller cutters and crimping machines for $18 per hour, and the marginal product of capital is 135 rollers per hour. Should you change the mix of capital and labor, and if so. how should it change?

Explanation / Answer

Given in the question that the last worker hired produces 110 rollers, implying that marginal product of labour is = 110.

Price of labour = $14.

The optimal condition for hiring workers = MPL/PL.

= 110/14

= 7.85

Similarly, the MPK = 135 and Pk = $18.

SO the optimal condition is = 135/18

= 7.5

Clearly, MPL/PL > MPK/PK.

We know in equilibrium, MPL/PL = MPK/PK, so to get to that situation, starting where MPL/PL > MPK/PK, if the manager changes the product mix, such that manager now chooses more of labour and less of capital, the output production can increase.

So option C is correct.

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