You are the manager of Lewis Co., Ltd. that currently uses 17 unskilled workers and 6 skilled workers.

2. You are the manager of Lewis Co., Ltd. that currently uses 17 unskilled workers and 6 skilled workers. Your company pays its unskilled workers the minimum wage but pays the skilled workers $9.75 per hour. Thanks to the new government legislation, the minimum wage in Illinois will increase from $7.25 per hour to $8.15 per hour (the values are hypothetical).

a. How will the new government legislation affect your optimal mix of inputs in the short run? Explain why.

b. How will the new government legislation affect your optimal mix of inputs in the long run? Explain why.

3. You are the CEO of Lewis Co,. Ltd., a firm that uses only two inputs, capital and labor, to produce output. The wage rate is $5/hour and the firm can rent as much capital as it wants at a price of $50/hour. After you look at the production data, you learn that at the current output level the marginal product of labor is 50 and the marginal product of capital is 100. Do you think the production manager is doing a good job? Why or why not? Explain.

Solutions

Expert Solution

In the short run, a higher minimum wage paid to unskilled labor implies that to minimize costs, the retailer should increase its use of skilled workers (S) and decrease its use or unskilled workers (U) to produce the same fixed level of output.

In the longer run, to produce the same fixed output level, the company will also substitute Capital for labor (invest in some machines to automate a portion of your needs), assuming unskilled labor and Capital are substitutes.

*This answer assumes that the level of output is fixed. It is also believed that the optimal mix of unskilled and semi-skilled labor was being used to increase the minimum wage.

MPL, MPK = increase in output by increasing one unit of labor and Capital, respectively;

Costs are minimized when the marginal product per dollar spent on all the available inputs is equal, i.e., MPL/w = MPK/r

where w is the wage and r is the Cost of Capital. IN this scenario, 50/5 is not equal to 100/50, so we can conclude that resources are not being utilized properly. He has to increase the utilization of labor so that MPL/w equals MPK/r.

The production manager is not doing a good job.

Rahul Sunny answered 1 year ago

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