Question

a. Suppose you manage a factory that has two plants. Your data shows that plant X produces more output per day compared to plant Z. As a result of this data, you decide to place all new hires at plant X. Have you made the right decision? If you made the right decision explain why. If you did not make the right decision, explain how you should make the decision.

b. Suppose the prices of some goods goes up. Does this mean that all consumers will spend more on their day to day living? Explain.

Answer 1

A) no. If all the new workers are placed at one plant then the marginal product, which is diminishing because of diminishing marginal returns to a variable factor, will continue to decline and will fall below the market wage. The optimal hiring rule indicates that hiring should be done till the point where the value of the marginal product is equal to the wage rate. This indicates that a hiring is optimal in both plants only when the value of the marginal product gets equal to the wage rate

B) it does not mean that consumer will have to spend more on their day to day living. this is because consumer basket is composed of several goods and services in which some will be now priced high what the price of some other goods might have reduced. Some consumers might not be purchasing these highly priced goods and services at all. Therefore it depends upon the consumer basket whether their cost of living increases.