Question

Accoridng to The wall street jorunal , Mitsubishi Motoers recentaly annoucned a major restructiring plan in an attempt to reverse declining global sales. Suppose that as part of the restructuring plan Mitsubishi conducts an analysisog how labor and capital are used in its production process. Prior to restucting Mitsubishi's marginal rate of technical substitution is 0.16(in absolute value). To hire workes , suppose Mitsubishi must pay the competitive hourly way of 1740. In the study of its production process and markets where capital is procured , suppose that Mitsubishi determins that its marginal productivity of capital is 0.8 small cars per hour at its new targeted level of output and that capital is produced in a highly competitive market. The same study indicates that the average selling price of Mitsubishis smallest caler is 1400000. Determine the rate at which Mitsubishis can rent capital and the marginal productivity of labor at its new targetted level of output. Enter response rounded to four decimal places Rental rate of capital: Marginal productivity of labor: To minimize cost Mitsubishi should hire capital and labor intil the marginal rate of technical substitution reaches what proportion? ( Response roudned to four decimal places)

Answer 1

At its new targetted level of output, the marginal productivity of capital is 0.8 small cars/ hour. Since the capital is produced in a highly competitive market, the nominal rental rate of capital should be equal to marginal revenue product of capital which in this case would be 0.8 * 1400000 = 1,120,000. ( Marginal Product of capital * Price of small car).

Similarly, since the competitive hourly wage rate is 1740, nominal wages should be equal to marginal revenue product of labor. i.e 1740= 1,400,000 * Marginal Product of labor. Hence, Marginal product of labor = 0.0012.

To minimise cost, Mitsubishi should hire capital and labor until MRTS = wage rate/ rental rate i.e 1740/1120000= 0.0015