The MorTex Company assembles garments entirely by hand even though a textile ma- chine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can produce 200 more units per day (i.e., marginal product is constant and equal to 200). Installation of the first textile machine on the assembly line will increase output by 1,800 units daily. Currently the firm assembles 5,400 units per day.
a. The financial analysis department at MorTex estimates that the price of at Textile machine is $600 per day. Can management reduce the cost of assembling 5,400 units per day by purchasing a textile machine and using less labor? Why or why not?
b. The Textile Workers of America is planning to strike for higher wages. Management predicts that if the strike is successful, the cost of labor will increase to $100 per day. If the strike is successful, how would this affect the decision in part (a) to purchase a textile machine? Explain.© BrainMass Inc. brainmass.com October 10, 2019, 3:37 am ad1c9bdddf
Daily output of one textile machine = 1800 units
Daily output of one labor = 200 units
Looking at above values, we find that output of one machine is 9 times the output of a labor. So, one machine can replace 9 workers.
Wage rate =$50 per day
Reduction in labor bill = $50*9=$450.
Increase in daily cost due to one machine =price of textile ...
Solution analyzes the effect of substituting labor with machine on costs.