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 $8 per hour and the last worker hired produced 100 rollers per hour. The company rents roller cutters and crimping machines for $16 per hour, and the marginal product of captial is 100 rollers per hour. What do you think the previous manager could have done to keep his job?

Explanation / Answer

given this, w=8 MPL=100 r=16 MPK=100 ==> MPL/w=(100/8) and MPK/r=(100/16) MPL/w=(200/16) and MPK/r=(100/16) This means MPL/w > MPK/r. So, we're not profit maximizing. We should hire more workers and employ less capital.

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