Question

A firm can use two different production technologies, with capital and labor requirements at each level of output as follows:

                        Technology 1             Technology 2

Output             K         L                      K         L         

1                      12        2                      4          14                   

2                      14        6                      6          20                               

3                      18        10                    8          28                               

4                      24        14                    10        40                   

(a) In general, which technology is most desirable?

(b) Suppose the firm is operating in a low-wage country, where capital cost is $8 per unit and labor cost is $4 per worker. For each level of output, which technology is the cheapest? Show your work.

(b) Now suppose the firm is operating in a high-wage country, where capital cost is $4 per unit and labor cost is $8 per worker. For each level of output, which technology is the cheapest? Show your work.

(c) Suppose the firm moves from a high-wage to a low-wage country but that its level of output remains constant at 3 units. How will its total employment change? Explain

Answer 1

Part a) In general Technology 1 is more desirable as it uses lesser units of Capital and Labor combined for producing the different levels of output.

Part b) We have the following information

Output	Technology 1
	Capital (K)	Labor (L)	Price of K ($)	Price of L ($)	Cost of K (K Units x Price of K)	Cost of L (L Units x Price of L)	Total Cost (Coat of K + Cost of L)
1	12	2	8	4	96	8	104
2	14	6	8	4	112	24	136
3	18	10	8	4	144	40	184
4	24	14	8	4	192	56	248

Output	Technology 2
	Capital (K)	Labor (L)	Price of K ($)	Price of L ($)	Cost of K (K Units x Price of K)	Cost of L (L Units x Price of L)	Total Cost (Coat of K + Cost of L)
1	4	14	8	4	32	56	88
2	6	20	8	4	48	80	128
3	8	28	8	4	64	112	176
4	10	40	8	4	80	160	240

As can be seen from the tables above, in the low-wage country Technology 2 is the cheapest for each level of output.

Part c) We have the following information

Output	Technology 1
	Capital (K)	Labor (L)	Price of K ($)	Price of L ($)	Cost of K (K Units x Price of K)	Cost of L (L Units x Price of L)	Total Cost (Coat of K + Cost of L)
1	12	2	4	8	48	16	64
2	14	6	4	8	56	48	104
3	18	10	4	8	72	80	152
4	24	14	4	8	96	112	208

Output	Technology 2
	Capital (K)	Labor (L)	Price of K ($)	Price of L ($)	Cost of K (K Units x Price of K)	Cost of L (L Units x Price of L)	Total Cost (Coat of K + Cost of L)
1	4	14	4	8	16	112	128
2	6	20	4	8	24	160	184
3	8	28	4	8	32	224	256
4	10	40	4	8	40	320	360

As can be seen from the tables above, in the high-wage country Technology 1 is the cheapest for each level of output.

Part d) If the firm moves from a high-wage to a low-wage country and its level of output remains constant at 3 units, then it will use Technology 2 for production as its cost of $176 is lower than the cost of Technology 1 ($184).

The firm will employ 8 units of capital and 28 units of labor.