W14 MIC Problem Set 5 Solutions

Answer laborl 60 mins 1 rug 5 rugs the marginal

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: nswer: Labor,!L ! 60 mins $! 1 rug $ ! 5 rugs $ The marginal product of a machine is 5 rugs per hour: MPK = # &# &=# & " hour %" 12 mins % " hour % The marginal product of a worker is 1 rug per hour. What is our cost-minimizing mix of capital and labor? We need to compare the marginal product per dollar spent for the two inputs to see which is more cost-effective. In other words, we need to compare MPK/PK to MPL/PL, where we use the rental price (r) and wage (w) to refer to the prices of capital and labor, respectively. MPK 5 rugs = = 0.125 rugs per dollar The marginal product per dollar spent on machines is r $40 MPL 1 rug = = 0.1 rugs per dollar The marginal product per dollar spent on labor is w $10 Thus, the producer gets a bigger “bang for the buck” with machines. Because machines and workers are perfect substitutes, the firm should hire only machines. At a rate of 5 rugs per hour, it would take 20 hours to produce 100 rugs. Thus, the total cost will be ($40/hr)(20 hrs) = $800. The optimum is illustrated at point A o...
View Full Document

Ask a homework question - tutors are online