Question

You were recently hired to replace the manager of the Roller Division at a major conveyor-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 $14 per hour and the last worker hired produced 75 rollers per hour. The company rents roller cutters and crimping machines for $15 per hour, and the marginal product of capital is 110 rollers per hour.

Should you change the mix of capital and labor, and if so, how should it change?

• You should increase labor and decrease capital.

• You should not change the mix of capital and labor.

• You should increase capital and decrease labor.

Answer 1

MPL is the marginal product of labor, which is here given as 75. Wage of labor is 14. Hence, MPL/wage = 5.36.

\MPK is 110 and the rent of capital = 15. Hence, MPK/rent = 7.3.

As, the ratio is higher in capital, hence you should increase capital and decrease labor.