A chair manufacturer hires its assembly-line labor for $20 an hour and calculates that the rental cost of its machinery is $10 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm is currently using 2 hours of labor for every two hours of machine time, is it minimizing its cost of production? If so, why? If not, how can it improve the situation? The firm OA. is not currently minimizing its cost of production because the ratio of the marginal product of labor to the marginal product of capital is equal t the ratio of the wage rate to the rental cost. OB. is currently minimizing its cost production because its marginal rate of technical substitution is less than the ratio of input prices. c. is not currently minimizing its cost of production because the marginal product of labor divided by the wage is less than the marginal product of capital divided by the rental cost. OD. is currently minimizing its cost of production because its marginal rate of technical substitution equals the ratio of input prices. OE. is not currently minimizing its cost of production because the ratio of the marginal product of labor to the marginal product of capital is greater than the ratio of the wage rate to the rental cost. To minimize the cost of production, the firm should use less labor and more capital. Graphically illustrate the isoquant and the two isocost lines for the current combination f labor and capital and for the optimal combination of labor and capital. Assume the firm is producing one chair. 1.) Using the line drawing tool, draw the isoquant. Label it 'Isoquant'. 2.) Using the line drawing tool, draw the isocost line for the current combination of labor and capital. Label it C₁. 3.) Using the line drawing tool, draw the isocost line for the optimal combination of labor and capital. Label it C₂. Capital (hours) 10- 9- 8- 7- 6- 5- 4- 3- 2 1- 2 Labor (hours)
A chair manufacturer hires its assembly-line labor for $20 an hour and calculates that the rental cost of its machinery is $10 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm is currently using 2 hours of labor for every two hours of machine time, is it minimizing its cost of production? If so, why? If not, how can it improve the situation? The firm OA. is not currently minimizing its cost of production because the ratio of the marginal product of labor to the marginal product of capital is equal t the ratio of the wage rate to the rental cost. OB. is currently minimizing its cost production because its marginal rate of technical substitution is less than the ratio of input prices. c. is not currently minimizing its cost of production because the marginal product of labor divided by the wage is less than the marginal product of capital divided by the rental cost. OD. is currently minimizing its cost of production because its marginal rate of technical substitution equals the ratio of input prices. OE. is not currently minimizing its cost of production because the ratio of the marginal product of labor to the marginal product of capital is greater than the ratio of the wage rate to the rental cost. To minimize the cost of production, the firm should use less labor and more capital. Graphically illustrate the isoquant and the two isocost lines for the current combination f labor and capital and for the optimal combination of labor and capital. Assume the firm is producing one chair. 1.) Using the line drawing tool, draw the isoquant. Label it 'Isoquant'. 2.) Using the line drawing tool, draw the isocost line for the current combination of labor and capital. Label it C₁. 3.) Using the line drawing tool, draw the isocost line for the optimal combination of labor and capital. Label it C₂. Capital (hours) 10- 9- 8- 7- 6- 5- 4- 3- 2 1- 2 Labor (hours)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A chair manufacturer hires its assembly-line labor for $20 an hour and calculates that the rental cost of its machinery is
$10 per hour. Suppose that a chair can be produced using 4 hours of labor or machinery in any combination. If the firm
is currently using 2 hours of labor for every two hours of machine time, is it minimizing its cost of production? If so,
why? If not, how can it improve the situation?
The firm
O A. is not currently minimizing its cost of production because the ratio of the marginal product of labor to the
marginal product capital is equal to the ratio of the wage rate to the rental cost.
O B.
is currently minimizing its cost of production because its marginal rate of technical substitution less than the
ratio of input prices.
C. is not currently minimizing its cost of production because the marginal product of labor divided by the wage is
less than the marginal product of capital divided by the rental cost.
O D. is currently minimizing its cost of production because its marginal rate of technical substitution equals the ratio
of input prices.
O E. is not currently minimizing its cost of production because the ratio of the marginal product of labor to the
marginal product of capital is greater than the ratio of the wage rate to the rental cost.
To minimize the cost of production, the firm should use less labor and more capital.
Graphically illustrate the isoquant and the two isocost lines for the current combination of labor and capital and for the
optimal combination of labor and capital. Assume the firm is producing one chair.
1.) Using the line drawing tool, draw the isoquant. Label it 'Isoquant'.
2.) Using the line drawing tool, draw the isocost line for the current combination of labor and capital. Label it C₁.
3.) Using the line drawing tool, draw the isocost line for the optimal combination of labor and capital. Label it C₂-
Capital (hours)
10
9-
8-
7-
6-
2-
2
Labor (hours)
ģ
Q
Q
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