Even an inebriated economist knows, from the standpoint of profit maximization,

Question

Even an inebriated economist knows, from the standpoint of profit maximization, the brewer) should never hire 5 workers. Carefully explain why utilizing the concept of efficiency. Suppose a computer manufacturer is currently producing a total of I million computers in two states, Iowa and South Dakota. The firm is currently employing 50,000 production workers, with 20,000 working in South Dakota and 30,000 working in Iowa. The monthly wage of a production worker in South Dakota is $1,000, while the monthly wage of a production worker in Iowa is $1,800. Suppose the price of a computer is $500. Desiring to continue producing I million computers and knowing that the marginal product of a production worker in South Dakota is I, while the marginal product of a production worker in Iowa is 4, explain why the firm should re-allocate labor away from South Dakota towards Iowa (i.e., cut back on workers in South Dakota and hire more workers in Iowa); Use isoquant analysis to illustrate your point(s).

Explanation / Answer

Marginal product means the additional number of products produce with an additional input of labor. It means that if one more labor is hired in South Dakota the overall output will increase by 1 whereas, with additional labor in Iowa the overall output will increase by 4. We know that the cost of hiring one more labor in South Dakota will be $1000 and it will increase the production by 1 whereas the cost of hiring one more labor in Iowa is $1800 and it will increase the production by 4. It is cost effective for the company to hire more workers at South Dakota.

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