Question

1.      Business is booming at the local McDonald's restaurant. It is contemplating adding a new grill and french-fry machine, but the day supervisor suggests simply hiring more workers. How should the manager decide which alternative to pursue?

a.      Compare the cost of the new grill and french-fry machine to the cost of additional workers. (which one is cheaper?)

b.     Compare the additional output of the new grill and french-fry machine to the additional output of more workers. (which one produces more?)

c.      Compare the additional output per dollar spent on the new grill and french-fry machine to the additional output per dollar spent on additional workers.

d.     None of the above

2.      Suppose a firm finds that the marginal product of capital is 60 and the marginal product of labor is 20. If the price of capital is $6 and the price of labor is $2.50. Should this firm adjust its mix of capital and labor? How? (i.e., more/less capital? more/less labor?)

3.      A firm minimizes its costs by using inputs such that the marginal product of labor is 10 and the marginal product of capital is 20. The price of capital is $10 per unit. What must the price of labor be?

4.      Suppose that the price of labor is $10 per unit and the price of capital is $20 per unit.

a.      Assuming the firm is minimizing its cost, if the marginal product of labor is 50, what must the marginal product of capital be?

b.     Suppose the price of capital increases to $25 per unit, while the price of labor stays the same. To minimize the cost of producing the same level of output, would the firm become more capital-intensive (i.e., more capital/less labor) or more labor-intensive?

5.      

a.      Suppose that the average age of students in your economics class is 23.7 years. If a new 19-year-old student enrolls in the class, will the average age in the class rise or fall?

b.     Suppose that the average output per worker is 23.7 units. If a new worker produces 19 units,

                                                             i.     is the marginal product of labor higher or lower than the average product?

                                                           ii.     Will the average output per worker (average product) rise or fall when you hire the new worker?

6.      

a.      Barry Bond's career home run average in his first 15 years in major league baseball (through 1997) was 33 home runs per season. In 2001, he hit 73 home runs. What effect did his performance in 2001 have on his career home run average?

b.     Suppose that you have 15 workers, and the average output per worker (average product) is 33. The 16^th worker will produce 73 more units. Will the average product rise or fall if you hire the 16^th worker?

Answer 1

1)Ans. Option - (c).

It is because the supervisor will compare how much it has to pay for additional output per dollar spend on machines and additional output per dollar spend on workers. It will not only compare additional output or additional cost rather it will take both of these. It means it will compare how much each machine and workers produced per unit of dollar spends. It means which gives higher output by spending same amount on machines and workers.

2)Ans. Given these data : MPK = 60 and MPL = 20 , Price of capital (r) = $6 and price labour (w) = $2.50

The firm should adjust it's mix of capital and labour. Because firm will be optimal when the ratio of marginal product to the ratio of its price will be same for capital and labour. It means for optimal mix of capital and labour there should satisfy the following condition :

MPL/w = MPK/r

Here MPL/w = 20/2.50 = 8 and MPK/r = 60/6 = 10.

Given the price of capital and labour fixed there must be either has to use less labour and/or more capital. It means there has to use less labour so that it's MPL will increase. There can be used more capital to reach the optimal mix because more capital use will reduce the MPK and that can help to reach MPL = MPK.

So, use less Labour or use more capital to reach optimal mix of capital and labour.

3)Ans. A firm minimizes it's cost that means firm must satisfy the following condition :

(MPL/w) = (MPK/r)

So, 10/w = 20/10

So, 10/w = 2

So, w = 10/2 = 5.

Therefore, there must be the price of labour is $5, to reach at cost minimisation.

4)Ans. (a) For cost minimisation there should satisfy the condition - (MPL/w) = (MPK/r)

It gives 50/10 = MPK/20

Or, 5 = MPK/20

Or, MPK = 100.

So, for cost minimisation given MPL = 50 , MPK must be 100. (Ans).

(b). Price of capital increases to $25 and price of labour is same i.e $10. As price of capital (r) has raised the should use more labour. Because relative price of labour is less. Before price increase of capital there was 1 capital = 2 Labour but after price increase of capital 1 capital = 2.5 Labour. As labour becomes more cheaper relatively there should use more labour.

To produce the same level of output firm must be more labour intensive.

(5)Ans. (a). Average age of the students in the Economics class is 23.7 years. If a new 19 year old student enrolls in the class then the average age of the students will fall. Because the age of the new enrolled student is below average. As its age is below average it will reduce overall average age than before.

5.(b). (i) Average output per worker is 23.7 units. If a new worker produce 19 units then marginal product of new labour is below the average product of labour.

Overall AP of labour is = 23.7 units but MP of new labour is 19 units and it shows MP of new labour is below the average product of labour.

5.(b).ii. Due to hire new worker the average product of labour will fall after the use of new labour. As MP of new labour is below average the overall AP of labour by taking new labour will fall.

(6). Ans. (a). The career home run average increased because it has reached in new higher level of 73 home runs per season. The MP of of 2001 was higher than the overall average. This higher MP in terms of better home runs actually increased the overall career home run average per season. The higher MP actually pulled out the AP of career home runs.

6)b. The AP of 15 workers is 33. The MP of 16th worker is 73 units. The MP of 16th unit is higher the AP of those 15 workers. As a result of hire of 16th worker the overall AP will rise after the use of 16th worker.

The higher MP than overall AP of 16th worker actually increases the overall AP of all workers. So, overall AP rises after the use of 16th worker.