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Business Case: The Ratio of Marginal Product

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 $12 per hour and the last worker hired produced 150 rollers per hour. The company rents roller cutters and crimping machines for $24 per hour; and the marginal product of capital is 150 rollers per hour. What do you think the previous manager could have done to keep his job?

Solution Preview

There is a very simple reason why the manager was replaced. The reason being the value of marginal product of the last unit of capital, and the last unit of labor was not the same. First let us look at labor. Labor is paid $12 per hour, and the last hired worker produced 150 rollers per hour. The marginal product of labor is 150, and the price for that marginal output is $12. Therefore, the ratio of marginal product to the price paid for it is:

(Marginal Product)/(Price) ...

Solution Summary

This solution provides a step by step response which illustrates how to calculate the ratio of marginal product to the price paid. This is all completed in about 340 words. This response also provides reasoning as to why the previous manager is being replaced.