Question

12.22 points eBook References According to The Wall Street Journal, Mitsubishi Motors recently announced a major restructuring plan in an attempt to reverse declining global sales. Suppose that as part of the restructuring plan Mitsubishi conducts an analysis of how labor and capital are used in its production process. Prior to restructuring Mitsubishi's marginal rate of technical substitution is 0.13 (in absolute value). To hire workers, suppose that Mitsubishi must pay the competitive hourly wage of ¥1,700. In the study of its production process and markets where capital is procured, suppose that Mitsubishi determines that its marginal productivity of capital is 0.85 small cars per hour at its new targeted level of output and that capital is procured in a highly competitive market. The same study indicates that the average selling price of Mitsubishi's smallest car is ¥900,000. Determine the rate at which Mitsubishi can rent capital and the marginal productivity of labor at its new targeted level of output.

Answer 1

Solution: Given The following information is given: MRTS = 0.13 w = 1700 mpk = 0.85 Small Cars per hour Price = 900,000 1. for optimal utilisation of capital of a force of production value of the marginal product of the capital must be equated to price of capital. That is, nmpk=8 mpk #p=r (0.85) (900,000) = 8 =(765000] factor of production 1 for optimal utilization of labor as a of the labor must Value of the marginal product

be equated to the price of labor. That is, umpl=w mpL *p=w PL * 0 0o = leo PL - (Woo ( 700000 ( L = 0 : 0 (8) $765000 and s. The sental rate of capital is marginal productivity of labor -0.0014. occurs at the point where MRTs » cost minimisation and sehtal price. is equal to ratio of wage Therefore, MRTS = Colo MRTS = 1700 / 765000 MATS = 0.0022) i. To minimise cost firmshould hire capital and labor till MRTS = 0.0022