Question

A local restaurant is expanding. The manager needs to decide whether to hire new employees or...

A local restaurant is expanding. The manager needs to decide whether to hire new employees or purchase more machines (capital). You know that employees cost $20/hour and produce about 30 more units of output (marginal product of labor) per hour. You know that machines cost about $10/hour and produce about 15 more units of output (marginal product of capital) per hour. The manager should...

Expand by hiring more employees but no more machines.

Expand by purchasing more machines but no more employees.

Expand by hiring new employees and purchasing new machines at roughly the same ratio that we already have. Workers and machines are equally as productive per dollar spent.

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Answer #1


Price of labor (PL) = $20

Marginal product of labor (MPL) = 30

So,

MPL/PL = 30/20 = 1.5

Price of capital (PK) = $10

Marginal product of capital (MPK) = 15

So,

MPK/PK = 15/10 = 1.5

It can be seen that,

MPL/PL = MPK/PK

This implies that the manager should expand by hiring new employees and purchasing new machines at roughly the same ratio that we already have. Workers and machines are equally as productive per dollar spent.

Hence, the correct answer is the option (3).

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