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    Business is booming at a local fast food restaurant

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    1. Business is booming at a local fast food restaurant. It is contemplating adding a new grill and french fry machine, but the day supervisor suggests simply adding more workers. How should the manager decide which alternative to pursue? What would happen if too much labor is hired without an addition to capital? Explain using economic terms.

    2. Read the following short article and answer the question:

    Vargas, L. (2001). "Maquiladoras: Impact on Texas Border Cities," in The Border Economy, Federal Reserve Bank of Dallas. Retrieved on December 2, 2011 from: http://www.dallasfed.org/research/border/tbe_vargas.html

    How does this article apply the marginal decision rule to the problem of choosing the mix of factors or production (capital intensive vs. labor intensive methods of production)? How do maquiladoras benefit the U.S. economy?

    3. What is the difference between the short-run and the long-run for a perfectly competitive firm in terms of costs and profits? Explain why a perfectly competitive firm may continue to operate in the short-run even with a loss of profits.

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    Solution Preview

    1) The manager at the local fast food restaurant, should consider whether the limiting factor in making enough food or to serve his customers is due to not enough employees to make and serve the food or that the machines are being run at capacity. In economic terms, is there a shortage of capital or labor? In order to make the food, there is a requirement of sufficient labor and sufficient capital equipment. For instance, if the french fry machine is sitting there not being used at capacity and there are orders and customers waiting because there are not enough employees to make full useage of the machines, then the manager should hire more labor. On the other hand, if the machines are already being run at capacity and there are employees with free time on their hands, then the manager should add ...

    Solution Summary

    Examining capital vs labor, long-run and short-run, using a booming restaurant as an example.

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