According to The Wall Street Journal , Mitsubishi Motors recently announced a ma

Question

According to The Wall Street Journal, Mitsubishi Motors recently announced a major restructuring plan in an attempt to reverse declining global sales. Suppose that as part of the restructuring plan Mitsubishi conducts an analysis of how labor and capital are used in its production process. Prior to restructuring Mitsubishi’s marginal rate of technical substitution is 0.12 (in absolute value). To hire workers, suppose that Mitsubishi must pay the competitive hourly wage of ¥1,800. In the study of its production process and markets where capital is procured, suppose that Mitsubishi determines that its marginal productivity of capital is 0.8 small cars per hour at its new targeted level of output and that capital is procured in a highly competitive market. The same study indicates that the average selling price of Mitsubishi’s smallest car is ¥1,200,000. Determine the rate at which Mitsubishi can rent capital and the marginal productivity of labor at its new targeted level of output.

Instruction: Round your answer for marginal productivity of labor to 4 decimal places.


Marginal productivity of labor:

The answer is not .0023 or .096. I am stuck on what it could be

Explanation / Answer

Note that firm uses capital and labor to produce cars both of which are variable factors. So the long run cost minimization rule will suggests two rules:

1) MRTS = wage-rental ratio

2) Workers are paid the value of their marginal product and capital should be paid the value of its rental cost.

Choose the second rule and note that the price of the product is a reflection of marginal products of inputs as in:

Rental cost of capital r = Price of product * MPK.

The new MPK = 0.8 and the price of car is ¥1,200,000 so that:

r = ¥1,200,000*0.8 = ¥960,000

Use the second rule now. Note that

MRTS implies MPL/MPK = W/R

MPL/0.8 = 1800/960000 = 0.0015.

Hence, the rate at which Mitsubishi can rent capital is ¥960,000 and the marginal productivity of labor at its new targeted level of output is 0.0015

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.