Question

Medfin Accounting Company (MAC) specializes in providing accounting and tax services for medical establishment and professionals. Presently, the company's production method is highly labor-intensive because many of the bookkeeping tasks are done manually. MAC employs 50 workers (L) paying them each, on average, $50,000 per year. MAC also has 40 computers (K). The company has leased these computers along with their accompanying software packages at $5,000 per year each. Presently the firm provides accounting and tax services to 150 clients.

a. Write the equation for the company's  isocost.  

b. At this given mix of inputs ( K = 40, L= 50) the firm's marginal rate of technical substitution (MPL/MPK) is -6. Is this mix of capital and labor that MAC is using efficient (optimal)? Explain as specifically as you can.

c. If your answer to (b) is no, what changes should the firm make in its production style?  

d. Assuming that the firm wants to serve the same number of clients, how would the changes that you might be suggesting would affect the company's revenue, costs, and profit?

e. Now starting back from the original mix of computers (capital) and labor -- that is 50 workers and 40 computers --, suppose the company wants to increase the size of its  clientele. How would you suggest the company should pursue its expansion plan? What is the most efficient approach to this expansion? Should the company hire more labor and acquire more computers right away?

Be as specific as you can.