You have been appointed Global Manager of a firm that has two plants, one in the United States and one in Mexico. Assume, you cannot change the size of the plants or the amount of capital equipment. The wage in Mexico is $5. The wage in the U.S. is $20. Given current employment, the marginal product of the last worker in Mexico is 100, and the marginal product of the last worker in the U.S. is 500.
a. Is the firm maximizing output relative to its labor cost? Show how you know.
b. If it is not, what should the firm do?
a.Is the firm maximizing output relative to its labor cost? Show how you know.
For profit maximization, the ratio of Marginal Product to wage rate of labor for two countries should be same.
MP Mexico / ...
Solution depicts the methodology to check whether a firm is maximizing its output having presence in two countries.