Question

Suppose you are the new Manager of Kramerica Korporation, a firm which makes large rubber bladders...

Suppose you are the new Manager of Kramerica Korporation, a firm which makes large rubber bladders for oil tankers with two inputs capital and labor. On your first day, you discover that the marginal product of capital is 1,000, the price of capital or rent is $100, the marginal product of labor is 500 and the price of labor or the wage rate is $25. Based on these numbers,

     a. Is Kramerica employing its two inputs optimally? How do you know?

     b. What would you do as the new Manager, and why?  

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a) MPL = 500

w = $25

MPK = 1000

PK = $100

To determine the optimal capital labor ratio set the Marginal rate of technical substitution equal to the ratio of the wage rate to rental rate of capital. If this is equal than this is the optimal solution. if this is not equal than this is not the optimal solution.

MRTS = MPL / MPK = w/r

=  500 / 1000 = 25 / 100.

So this is not the optimal solution. because .

b) here

  

New manager will employ more labor so that quantity of labor increases. and if quantity of labor increases MPL decreases. So manager will continue to hire more labor till . Manager will do this to find the optimal number of inputs.

  

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Suppose the marginal product of labor is 8 and the marginal product of capital is...
1. Suppose the marginal product of labor is 8 and the marginal product of capital is 2. The wage rate is $4 and the price of capital is $2. a. Is the firm using the cost minimizing combination of inputs? b. How do you know? c. If you do not believe that the firm is using the cost minimizing combination of inputs, should the firm increase or decrease capital (and why)?
Suppose you manage a firm whose marginal product of capital is currently 16 and whose marginal...
Suppose you manage a firm whose marginal product of capital is currently 16 and whose marginal product of labor is currently 5. The rental price of capital is 5, and the wage is 2. If you want to expand output, should you increase capital or labor? Explain. If you do what is in part B, which of your numbers are likely to change? As this process unfolds, what equation will become true?
Suppose you manage a firm, which is a monopsony in the labor market and a monopoly...
Suppose you manage a firm, which is a monopsony in the labor market and a monopoly in the product market. Suppose another firm moves into your market, hiring from the same pool of workers and selling an identical product to the same set of customers. Use the model of monopsony to analyze the impact of the new firm on the quantity of output you produce (Q), the price your firm should charge (P), the quantity of workers you employ (L),...
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...
Suppose you are a manager of a firm that operates in a duopoly. Recently, the state...
Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $6.78. Further, your marginal costs are $6.76. The previous cartel price was $10.00, when you and your competitor were price fixing. What price level do you now choose to maximize...
a. A firm uses only two inputs: capital (K) and labor (L).Currently, the firm’s choice of...
a. A firm uses only two inputs: capital (K) and labor (L).Currently, the firm’s choice of capital (K) and labor (L) are such that marginal product of capital is 80 and the marginal product of labor is 10. If one put Labor on the x-axis, derive the slope of the firm’s isoquant given the information above (include the formula you use to do this). b. The price of capital (Pk) is $40 and the price of labor (PL) is $20....
You are the manager of a small pharmaceutical company that received a patent on a new...
You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($225 million last year) and a low marginal cost of producing the product ($0.70 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.3 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current...
You are the manager of a small pharmaceutical company that received a patent on a new...
You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($150 million last year) and a low marginal cost of producing the product ($0.55 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.6 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current...
You are the manager of a firm that competes against four other firms by bidding for...
You are the manager of a firm that competes against four other firms by bidding for government contracts. While you believe your product is better than the competition, the government purchasing agent views the products as identical and purchases from the firm offering the best price. Total government demand is Q = 1900 -10P and all five firms produce at a constant marginal cost of $120. For security reasons, the government has imposed restrictions that permit a maximum of five...
You are the manager of a small pharmaceutical company that received a patent on a new...
You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($150 million last year) and a low marginal cost of producing the product ($0.50 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.7 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT