In 2009 General Motors (GM) announced that it would reduce employement by 21,000

Question

In 2009 General Motors (GM) announced that it would reduce employement by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? Why didn't GM reduce employement by more than 21,000 workers? By fewer than 21,000 workers?

Explanation / Answer

In 2009 General Motors (GM) announced that it would reduce employement by 21,000 workers. What does this decision reveal about how GM viewed its marginal revenue product (MRP) and marginal resource cost (MRC)? That MRC > MRP, indicating that MRC - the cost of the workers, and therefore the number of workers - needed to be reduced. Why didn't GM reduce employement by more than 21,000 workers? By fewer than 21,000 workers? Because MRC - (marginal cost of 21,000 workers) = MRP In other words, 21,000 workers probably restored the MRP = MRC equation that is necessary to maximize profits.

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