Question

Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.
D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.

Answer 1

Ans. Suppose labour productivity in US is x and in Japan is y

This means,

In 1 hour US makes x units of the good and Japan makes y units of the good

If labour cost per hour in US is $20 and in Japan is $10, then the per unit cost of the good in US is $20/x per unit and in Japan $10/y.

The production cost will be lower in US as compared to Japan if,

20/x < 10/y

=> x/y > 2

So, out of all the available options, we can calculate this x/y ratio,

a) US productivity / Japan productivity = x/y = 40/15 = 2.6667

b) US productivity / Japan productivity = x/y = 30/20 = 1.5

c) US productivity / Japan productivity = x/y = 20/30 = 0.6667

d) US productivity / Japan productivity = x/y = 15/25 = 0.6

e) US productivity / Japan productivity = x/y = 15/40 = 0.375

Thus, only option a, with US labour productivity of 40 units per hour and Japan's 15 units per hour satisfy the condition (xy > 2) required for US cost of production being lower than Japan's.