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##### Two Variable Inputs Problem

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A. The Largo Publishing House uses 400 printers and 200 printing presses, presumably along with other inputs, to produce books. A printer?s wage is \$20/day and the cost of using a printing press is \$5,000/day. The last printer hired added 20 books to total output, i.e., the marginal product corresponding to the amount of printers used is 20, and the last printing press added 1,000 books to total output, i.e, the marginal product corresponding to the amount of printing presses employed is 1,0000.;1. Is the publishing house using the optimal amount of these two inputs? [Hint: To answer this question it is necessary to determine if the MP/\$ equilibrium condition is being satisfied.];2. If the Largo Publishing House isn?t using the optimal amount of these two inputs, how should it adjust its input usage ? use more printers, less printing presses, or more printing presses and less printers, or more of both, or less of both, or do nothing? Explain.;B. Gamma Corporation, a firm that retains you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is barely operating at a profit. You recommend the buyout because you believe that new management could substantially reduce production costs, and thereby increase profits. You collect the following information;MP for labor = 10 Price of labor =\$20;MP for capital = 15 Price of capital = 15;1. Explain how these data provide evidence of inefficiency. [Hint: To answer this question it is necessary to determine if the MP/\$ equilibrium condition is being satisfied.];2. How could the new manager improve efficiency, i.e., reduce the costs of producing the same level of output, by adjusting its input usage? Should it use more labor, less capital, or more capital and less labor, or more of both inputs, or less of both inputs, or do nothing? Explain.;C. Several years ago, the U.S. was sending engineers and other technical experts to developing countries to advise them on the latest technological methods in manufacturing and agriculture that are used in the U.S. They also assisted these developing countries in implementing these modern technological methods.;For some agricultural or manufactured product, assume that all inputs can be divided into two categories: labor and capital. Consider an isoquant corresponding to some amount of an agricultural or manufactured product.;1. What would be the ratio of capital to labor used in the U.S. in manufacturing or agriculture? Labor intensive or capital intensive?;2. Explain why, in many of these countries, the implementation of the technologies used in the U.S. were utter failures, resulting in greater cost than other methods. Explain why, in many instances, the old fashioned methods worked better, i.e., resulted in a lower cost of producing some level of output. [Hint: in developing countries, what is the price of labor relative to the price of capital and what are the implications of this for the slope of the isocost curves? What are the implications of the input price ratio for the optimal amount of labor and capital to use to produce some amount of a manufactured or agricultural product?];3. Why is the technology that was proposed appropriate for the U.S? [Hint: what is the price of labor relative to the price of capital in the U.S? What are the implications of that input price ratio for the slopes of the isocost curves and the equilibrium combination of inputs?];D. Suppose that a firm can produce some level of output using 5 units of labor (L) and 5 units of capital (K) or 10 units of labor (L) and 2.5 units of capital (K). Calculate the MRTSLK.

Paper#21638 | Written in 18-Jul-2015

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