The owner of a small car rental service is trying to decide on the appropriate n

Question

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 tradeoff is as follows: If the annual leasing cost per vehicle is $6000 & the annual salary per mechanic is $25,000. What combination of vehicles & mechanics should he employ? 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: If we use output per person as a proxy for marginal product, what is output/wage rate for each country? Which location has the highest MP per dollar? Mexico Taiwan Canada Cannot determine with the information available.

Explanation / Answer

In the above table a small car rental service company is hiring vehicles and mechanics. Different combinations are mentioned. You have to select the best one. It will be found where total cost is minimu. The calculation of leasing cost of vehicle and salary payable to mechaics are made. Then costs are added in last column to get total.

Note that total cost is miimum in row 2. It is $545,000. So optimal combiation is 70 vehicles and 5 mechanics.

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Problem:17 An US based company is maufacturing its product in Mexico, Taiwan and Canada. Hourly wages and number of units produced per hour are mentioned in the problem. Divide quatity by wage rate to get marginal product per dollar. It is also known as output/wage rate ratio. It is calculated below

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Question 18: Highest marginal product per dollar is 6.67. It is observed in Mexico.

Vehicle Mechaics Lease cost Salary Total cost 100 2.5 100x6,000=$600,000 2.5x25,000=$62,500 $662,500 70 5 70x6,000=$420,000 5x25,000=$125,000 $545,000 50 10 50x6,000=$300,000 10x 25,000=$250,000 $550,000 40 15 40x6,000=$240,000 15x25,000=$625,000 $835,000 35 25 35x6,000=$210,000 25x25,000=$625,000 $835,000 32 35 32x6,000=$192,000 35x25,000=$875,000 $1,067,000

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