According to The Wall Steel Journal. Mitsubishi Motors recently announced a majo

Question

According to The Wall Steel 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 0.16 (in absolute value). To hire workers, suppose that Mitsubishi must pay the competitive hourly wage of Y1.500. In the study of its production process and markets where capital is procured, suppose that Mitsubishi determines that its marginal productivity of capital is 0.75 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 Y1.100.000. Determine the rate at which Mitsubishi can rent capital and the marginal productivity of labor at its new targeted level of output. Instruction: Round your answer for marginal productivity of labor to 4 decimal places. Rental rate of capital: ¥ Marginal productivity of labor: To minimize costs Mitsubishi should hire capital and labor until the marginal rate of technical substitution reaches what proportion? Instruction: Round your answer to 4 decimal places.

Explanation / Answer

Given that the marginal rate of technical substitution previously is 0.16

The wage =1500

Marginal productivity of capital (MPK)=.75 small cars

The selling price of small cars=1100000

We know that Rental rate of capital=Price of the car* Marginal productivity of capital=1100000*0.75=825000

Similarly, Wage= Price of the car* Marginal productivity of labour(MPL)

This means that 1500=1100000*MPL

So MPL=1500/1100000= 0.00136

To minimize costs Mitsubishi should hire capital and labor where the marginal rate of technical substitution = MPL/MPK=0.00136/0.75=0.0018

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