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Optimal output level

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You have been appointed as Global Manager of a firm that has two plants, one in the United States and one in Mexico. Assume, you 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.

Is the firm maximizing output relative to its labor cost? Yes or No. Show how you know. If it is not, what should the firm do?

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Solution Summary

Solution describes the steps to check if the given firm is maximizing its output relative to its labor cost.

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a. Is the firm maximizing output relative to its labor cost? Show how you know.

For optimal input combination, the ratio of Marginal Product to wage rate of labor for two countries should be same.

MP ...

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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