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Problem #5: Cl View the diagram on the right to answer parts (a) and (b) of this question which contains two isocost lines and an isoquant curve which represent production of 100 units. Briefly explain why the combination of capital and labor represented by point B is a better choice than the combination of capital and labor represented by point A? a. Q 100 units of output b. What condition must be meet at point B? You were recently hired to replace the manager of the Roller Division at a major conveyer-manufacturing firm, despite the manager's strong external sales record. Roller manufacturing is relatively simple, requiring only labor and a machine that cuts and crimps rollers. As you begin reviewing the company's production information, you learn that labor is paid $8 per hour and the last worker hired produced 100 rollers per hour. The company rents roller cutters and crimping machines for $16 per hour, and the marginal product of capital is 100 rollers per hour. What do you think the previous manager could have done to keep his job? c.

Answer 1

Answer:

(a) Explanation why B is better choice than choice A:

Every point in Q0 provides the same output of 100.

Therefore point A and point B provides same output.

Point A is on C1 whereas point B is on C0

C1 is towards right of C0 that indicates C1 > C0

Hence it is quite clear that if we can produce same output with lower cost then that combination is preferred over that bundle with higher cost.

Thus point B is chosen over point A

(b) condition at point B is:

At point B isocost curve C0 meers with isoquant curve Q0, that means at point B

slope of isocost C0 = slope of isoquant Q0

Slope of Isocost C0 = w/r

slope of isoquant Q0 = marginal rate of substitution

= MRS _L,K

_Hence

  MRS _L,K = w/r

(c)

At equilibrium

MP_L / MP_K = w/r

MP_L = marginal product of labor

MP_K = marginal product of capital

MP_L / MP_K = 100 / 100

w/r = 8/16

MP_L / MP_K > 8/16

Thus previous manager should have tried to cut down rent on capital

so that

MP_L / MP_K = 1 = w/r