Your firm produces clay pots entirely by hand even though a pottery machine exis

Question

Your firm produces clay pots entirely by hand even though a pottery machine exists that can make clay pots faster than a human. Workers cost $80 per day and each additional worker can produce 20 more pots per day (i.e., marginal product is constant and equal to 20). Installation of the first pottery machine would increase output by 300 pots per day. Currently your firm produces 1,800 pots per day.

a. Your financial analysis department estimates that the price of a pottery machine is $2,000 per day. Can you reduce the cost of producing 1,800 pots per day by adding a pottery machine to your production process and reducing the amount of labor? Explain why or why not.

b. If a labor union negotiates higher wages so that labor costs rise to $160 per day, does this change your answer to part a? Explain.

c. Suppose your firm wants to expand output to 2,500 pots per day and input prices are $100 and $2,000 per day for labor and capital, respectively. Is it efficient to hire more labor or more capital? Explain.

Explanation / Answer

A) No, the cost will not be reduced due to the fact that marginal product is constant overall, thus each additional worker can produce 20 pots for an amount of $ 80 per day. B) Yes, the answer will change due to the the fact that labour will cost now : 1800 pots / 20 pots by each worker : 90 workers * 160 per day: $ 14400 While the pottery machine has an output by : 300, so to achieve an output of 1800, the firm will need 6 machines thus 6 * 2000 = $ 12000 , thus by purchasing machines it is cheaper to make pottery own then what was in the past. C) Labor due to the fact that 15 labors can make up to 300 pots per day, and will cost $ 1500 which is lesser than what the machine chooses. Machine will cost : 9 *2000 = 18000 to make the units required by the firm, while labor will cost : 12500 to make the same level of output thus the firm will be able to save an amount of 5500 due to the usage of labors.

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