Recently, the Boeing Commercial Airline Group ( BCAG) recorded orders for more t
ID: 1251616 • Letter: R
Question
Recently, the Boeing Commercial Airline Group ( BCAG) recorded orders for more than 15,000Jetliners and delivered more than 13,000 airplanes. To maintain is output volume, this Boeing division
Combines efforts of capital and more than 90,000 workers. Suppose the Europeon company, Airbus,
enjoys a similar production technology and produces a similar number of air craft, but that labor costs
( including fringe benefits) are higher in Europe than in the United states. Would you expect workers at
Airbus to have the same marginal product as workers at Boeing? Explain carefully.
Explanation / Answer
No, the Airbus employees should have a higher marginal product as the US employees. A firm maximizes profit by setting MPK/r = MPL/w, where MPK=marginal product of capital, r is the cost of capital, MPL is the marginal product of labor, and w is the effective cost of labor, which includes wages and benefits. We are told that the two firms have the same technologies. This implies that MPK/r is the same for both firms. However, the cost of labor, w, is greater for Airbus. Therefore, the MPL at airbus must be larger in order for the ratio to remain equal to MPK/r. Here is another way to think of this problem. The MPL starts out high because you're adding the best workers available. As you add more workers, the MPL falls as you are able to find less productive workers than the ones you already picked (you always pick the best ones first). So, a fall in workers will necessarily increase the MPL. A larger cost of labor induces a firm to shift away from using labor and toward using capital. That means the firm employs fewer workers. And fewer workers means a larger MPL. Here, we see Airbus has a higher cost of labor. So, they must also have a higher MPL.
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