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Labor & Manufacturing Cost Considerations in Maximizing Profit

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Company A seeks help making employment decisions. It employs labor and trucks by the hour and obtains both in competitive markets. It currently employs 100 hours of labor and 20 hours of trucking services at $24 and $36 per hour, respectively. It sells its output in a competitive market at $10 per unit. Output is currently 500 per hour. It knows that output rises by about 6 when it employs an additional hour of labor hours of trucking services remains constant at 20 and that output rises by about 12 when it employs an additional hour of trucking services and labor hours remains constant at 100.

a. If long-term contract prevent the firm from changing the amount of trucking services it rents, should the firm increase, decrease, or leave constant the amount of labor employed? The goal is to maximize profit. Show clearly and explain your analysis.
b. Can the firm reduce its total cost of producing 500 units per hour if both inputs are variable? Either explain how or why not. Show clearly and explain your analysis.

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Solution depicts the steps to check for optimal input combination in the given case.

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a. If long-term contract prevent the firm from changing the amount of trucking services it rents, should the firm increase, decrease, or leave constant the amount of labor employed? The goal is to maximize profit. Show clearly and explain your analysis.

Marginal Product of labor-hour=MPL=6 (keeping trucking services at 20 hours)
Marginal Cost of labor-hour=MCL=$24
Marginal ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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