Question

2. A firm wants to expand production. Currently they use 40 workers together with four service robots. The firm added two robots four months ago and output increased by 5%. Two months ago they added ten workers and output increased by 10%. Each robot added is equivalent in cost to adding 3 workers. Should their next expansion add more workers or more robots?

Answer 1

Let us analyze the effect of previous robot addition

Increase in output on adding 1 robot=5%/2=2.5%

It is equivalent to increase in output on adding one labor=2.5%/3=0.833%

Let us analyze the effect of previous labor addition

Increase in output on adding 1 labor=10%/10=1.0%

It means that output has increased more due to per unit addition of labor.

So,

Firm should employ more workers in next expansion.