Question

1. The Carrier company, based in Jupiter, Florida has the option of manufacturing air conditioners in one or more of three locations: Indianapolis, Indiana; Windsor, Ontario; or Monterrey, Mexico. Suppose that Carrier’s production workers in the three locations are perfect substitutes in the production of a fixed output: they do essentially the same job of assembling air conditioners from parts. The level of prevailing wages in the three locations, in order, is $20, $15, and $10 per hour. The hourly productivity of the workers in the three locations, in order, is $30, $25 and $14.
   1. How should Carrier allocate its production across these three locations?
   2. How would your answer change if, instead of working independently, the workers in the three locations were imperfect substitutes in the production of a fixed output? Provide examples of how the workers could be imperfect substitutes across locations.

2. Describe the ‘bang-per-buck’ rule for firms
   1. with a linear production function
   2. when inputs are imperfect substitutes in the production of a fixed output

3. Define the Marginal Rate of Substitution (MRS) between two inputs. Describe how it changes as we move along an isoquant in the following three cases: imperfect substitutes, perfect substitutes, and antagonistic inputs.

4. Define option value as it relates to hiring a new worker.

Answer 1

"Bang per buck" rule for firms:

As to the best of my knowledge the Bang per buck rule for the firms is related to the cost minimisation by using labour and capital intensive techniques .

Cost minimization is a basic rule used by producers to determine what mix of labor and capital produces output at the lowest cost. In other words, what the most cost-effective method of delivering goods and services would be while maintaining a desired level of quality.

An essential financial strategy it is important to understand why cost minimization is important and how it works.

So Basically in short run a producer can hire only labour to produce more but in long run he can hire labour and also can use capital.

There fore, the long run production function has 2 inputs: Capitla (K) and labor(L).

Cost minimisation Rule:

Means where ratio of Marginal product from labour techniques and their wages gets equal to the ratio of marginal product form capital and price of capital. At that point the production will have minimum cost.

If there is not balance in this equation Then we have to balance it by hiring more labours if left side is more or investing more capital if right side is more.