A firm has two plants, one in theUnited States and one in Mexico, and it cannot

Question

A firm has two plants, one in theUnited States and one in Mexico, and it cannot change the size ofthe plants or the amount of capital equipment. The wage inMexico is $5. The wage in the U.S. is $20. Givencurrent employment, the marginal product of the last worker inMexico is 100, and the marginal product of the last worker in theU.S. is 500.

Which of the following statements is mostaccurate?
A. The firm ismaximizing output relative to its labor cost and should continueoperations without making any changes.
B. The firm is notmaximizing output relative to its labor cost, the U.S. is moreefficient than Mexico, therefore the firm should hire more U.S.workers and fewer Mexican workers.
C. The firm is notmaximizing output relative to its labor cost, Mexico is moreefficient than the U.S., therefore the firm should hire moreMexican workers and fewer U.S. workers.
D. It is notpossible to determine whether the firm is maximizing outputrelative to its labor cost without more information. A firm has two plants, one in theUnited States and one in Mexico, and it cannot change the size ofthe plants or the amount of capital equipment. The wage inMexico is $5. The wage in the U.S. is $20. Givencurrent employment, the marginal product of the last worker inMexico is 100, and the marginal product of the last worker in theU.S. is 500. Which of the following statements is mostaccurate? The firm ismaximizing output relative to its labor cost and should continueoperations without making any changes. The firm is notmaximizing output relative to its labor cost, the U.S. is moreefficient than Mexico, therefore the firm should hire more U.S.workers and fewer Mexican workers. The firm is notmaximizing output relative to its labor cost, Mexico is moreefficient than the U.S., therefore the firm should hire moreMexican workers and fewer U.S. workers. It is notpossible to determine whether the firm is maximizing outputrelative to its labor cost without more information.

Explanation / Answer

The answer is B, because since the marginalcost are already computed into the marginal product that cannot betaken into account. So you simply take the marginal product forMexico (100)/$5=20 versus the U.S. (500)/$20=25. The U.S. moreefficient by a marginal product of 5. Thus to maximize efficiencythe firm should hire more U.S. workers and fewer Mexicanworkers.

Hope it helps. :)

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