Second Mid-Term (Alternative) Test

Second Mid-Term (Alternative) Test

Part One (Chapter 6)

Problem #3, Chapter 6 on Production

A firm has the following short-run
production function:

Q = 50L + 6L^2 – 0.5L^3
Where Q = Quantity of output per week

L = Labor (number of workers)

^ exponential power. L^2 implies L square

Since all the necessary computations for
the problem are available, all you need to do is to include only the relevant
and necessary portion of the computations provided in Moodle. However, you
need to explain very clearly in your own word, all the implications behind the
numbers.

Assume that each worker is paid $10 per hour and works a 40-hour
week. How many workers should the firm hire if the price of the output is
$10?During economic down turn, firms reduce price in order to stay
competitive. For this reason, the price of the output falls to $7.50. What
do you think be the short run impact of this price reduction on the number
of workers hired and why?What would firms do in the long run as far as production and
hiring are concerned and why if economics situation does not improve and
price reduction does not help their bottom line? Consider what business
usually does if economic woe persists. Henry Ford, the founder of Ford Motor Company, offered in 1914
$5 workday wage, which was about twice the going wage. What is the
rationale behind Ford’s high-wage policy to the marginal productivity
theory of employment discussed in the text book? What is the major
difference in their respective goals? Be specific as to what each approach
tries to achieve. Ford called “the $5-a-day wage” one of the finest
cost-cutting moves.

In any hiring
decision, there are typically three different problems; “adverse selection” due
to “asymmetry of information” prior to hiring and of “moral hazard” after
hiring in your answer. Please integrate these three terms, asymmetry of
information, adverse selection, and moral hazard into your answer and explain
clearly how Ford’s high wage policy specifically solved these three problems
associated with hiring?
.

Problem #4, Chapter 6 on Production

The owner of a small car-rental service is
trying to decide on the appropriate numbers of vehicles and mechanics to use in
the business for the current level of operations. He recognizes that his choice
represents a trade-off between the two resources. His past experience indicates
that this trade-off is as follows:

Vehicles Mechanics

100
2.5 (include one part-timer)
70
5
50
10.
40
15
35
25
32
35

1.
Assume that annual (leasing)
cost per vehicle is $6,000 and the annual salary per mechanic is $25,000. What
combination of vehicles and mechanics should he employ?
2.
Illustrate the problem with the
use of an iso-quant/iso-cost diagram with number of vehicle leased on
horizontal axis and number of mechanics hired on vertical axes. Draw two
iso-cost curves: one using annual the leasing cost per vehicle ($6,000) and the
annual salary per mechanics ($25,000) given in the problem. In this case leasing
vehicle cost is relatively inexpensive to the annual salary per mechanics, Now,
another iso-cost curve, hypothetical (no data given) this time, in which annual
mechanics cost is relatively inexpensive to vehicle leasing cost. Indicate
graphically the (two) optimal combinations of mechanics hired and vehicles with
one iso-quant curve representing a given (target) level of vehicle leasing business
with two iso-cost curves; one based on given values of the annual cost of
hiring mechanics and leasing vehicles in the problem and another iso-cost
curve, hypothetical one, in which mechanics cost is relatively inexpensive,
i.e., two reverse cases of iso-cost curves, and discuss implication behind two
different optimal combinations of resources. To be consistent vehicles leased
on horizontal and mechanics on vertical axes.

Problem #5, Chapter 6 on Production

An American company that sells consumer
electronics products has manufacturing facilities in Mexico,
Taiwan, and Canada. The
average hourly wage, output, and annual overhead cost for each site are as
follows:

Mexico Taiwan Canada

Hourly wage rate $1.50 $3.00 $6.00

Output per person
10 18 20

Fixed overhead cost
$150,000 $90,000 $110,000

1.
Given these figures, is the
firm currently allocating its production resources optimally? If not, why do
you think so? Consider output per person as a proxy for marginal product.
2.
Suppose the firm wants to
consolidate all of its manufacturing into one facility. Where should it locate?
Is there any difference in treating cost information between (1) and (2)?
3.
In deciding to consolidate its
manufacturing into one facility, what are other factors the firm needs to
consider? Please list and explain your reasons.
4.
Nike outsources its
manufacturing operation whereas New Balance does not.
In terms of
marginal productivity (output per person) and hourly wage rate, explain why New
Balance did not outsource its production whereas Nike did briefly.