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    Economical choice of inputs

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    The MorTex Company assembles garments entirely by hand even though a textile machine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can product 200 more unit 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 a 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?

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    Solution Preview

    A.

    Daily output of one machine = 1800 units
    Daily output of one labor = 200 units

    Clearly 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 machine for one day= $600 per ...

    Solution Summary

    Solution checks if the cost can be reduced by purchasing a textile machine and using less labor.

    $2.19