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Maximizing Output Relative to Labour Costs

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A firm has two plants, one in the United States and one in Mexico, and it 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?
b. If it is not, what should the firm do?

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Solution Summary

In about 90 words, this solution illustrates how to compute whether a firm is maximizing it's output. A brief discussion of how output can be maximized relative to labour costs is also included.

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a. We need to compare MP over W:
In US, MP/W = 500/20 = 25
in Mexico, MP/W = 100/5 =20

This means that for each ...

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