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# chp 6 instructor manual - Chapter 7 PRODUCTION ANALYSIS AND...

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Chapter 7 PRODUCTION ANALYSIS AND COMPENSATION POLICY QUESTIONS AND ANSWERS Q7.1 Is use of least-cost input combinations a necessary condition for profit maximization? Is it a sufficient condition? Explain. Q7.1 ANSWER Employment of least-cost input combinations is a necessary but not sufficient condition for profit maximization. It is necessary because a failure to operate with a least-cost input combination means that costs could be lowered and profits increased at any given output level. It is not a sufficient condition because the cost-minimizing level does not incorporate any information concerning demand relations, and therefore provides no information about the optimal level at which to operate: that is, information concerning demand relations must be added to the analysis to determine how much to produce for profit maximization (an optimal level of output). In short, employment of a least-cost input combination will result in an optimal production of a target level of output. Conversely, employment of inputs such that MRP i = P i for each input will result in an optimal production of an optimal level of output. Q7.2 “Output per worker is expected to increase by 10 percent during the next year. Therefore, wages can also increase by 10 percent with no harmful effects on employment, output prices, or employer profits.” Discuss this statement. Q7.2 ANSWER This statement is correct so long as the projected increase in output per worker is solely due to an improvement in labor productivity and provided that the demand for output is also expected to rise. Gains in labor productivity are sometimes derived from an improvement in worker skill due to education or experience, elimination of obsolete work rules, labor-saving technical change, and so on. When increases in output per worker can be directly attributed to such gains in labor productivity, a commensurate increase in wages can be justified with no resulting increase in output prices or decrease in employer profits. So long as output demand is growing as fast as the gain in labor productivity, no reduction in employment opportunities will result. However, should output demand be stagnant, an increase in labor productivity could reduce employment opportunities by reducing the number of workers required to produce a given level of output. It is important to recognize that increases in output per worker are sometimes made possible by increased capital investment per worker, improvements in supplier efficiency, and so on. In such instances, increases in output per worker are not

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161 Chapter 7 directly attributable to gains in labor productivity, and do not imply that a higher wage rate could be justified. Q7.3
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chp 6 instructor manual - Chapter 7 PRODUCTION ANALYSIS AND...

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