You were recently hired to replace the manager of the Roller Division a t a majo

Question

You were recently hired to replace the manager of the Roller Division a t a major conveyor-manufacturing firm, despite the manager’s strong external sales record. Roller manufacturing is relatively simple, requiring only labor and a machine that cuts and crimps rollers. As you begin reviewing the company’s production information, you learn that labor is paid $8 per hour and the last worker hired produced 100 rollers per hour. The company rents roller cutters and crimpling machines for $16 per hour, and the marginal product of capital is 100 rollers per hours. What do you think the previous manager could have done to keep his job?

Explanation / Answer

We maximize profit when MPL/w = MPK/r Here: w=8 MPL=100 r=16 MPK=100 This means MPL/w=(100/8) and MPK/r=(100/16) We can rewrite this as: MPL/w=(200/16) and MPK/r=(100/16) This means MPL/w > MPK/r. So, we're not profit maximizing. We should hire more workers and employ less capital. If the previous manager had done that, he would have produced more profit and maybe kept his job.

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