You have been appointed “Global Manager” of a firm that has two plants, one in t
ID: 1248215 • Letter: Y
Question
You have been appointed “Global Manager” of a firm that has two plants, one in the United States and one in Mexico. Assume, you cannot change the size of the plants or the amount of capital equipment. The wage in Mexico is $5. The wage in the U.S. is $20. Given current employment, the marginal product of the last worker in Mexico is 100, and the marginal product of the last worker in the U.S. is 500.
a. Is the firm maximizing output relative to its labor cost? Show how you know.
b. If it is not, what should the firm do?
Explanation / Answer
A) It is not maximizing its profit Profit maximization will occur when marginal product/wage in mexico = marginal product/wage in the US Marginal product/wage in mexico = 100/5 = 20 Marginal product/wage in the US = 500/20 = 25 20?25 so profit is not maximized B) The firm should fire workers in mexico and hire workers in the US until Marginal product/wage (mexico) = marginal product/wage (US)
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