Question

A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 20,000 pages per day. One month ago, the firm added five workers, and productivity also increased by 25,000 pages per day. A copier costs about four times as much as a worker. Assume these increases in productivity per worker and productivity per copier are good proxies for future increases in productivity when hiring additional workers or purchasing additional copiers. Based on this information, the copy company should in order to expand output.

Answer 1

Answer:

The expansion should be adding more workers.

Explanation:

In this case we must analyze the marginal productivity of each production factor and relate it to its cost.

The marginal productivity of the copiers, assumed constant, can be calculated as

$\frac{\Delta P}{\Delta c}=\frac{20,000}{2}=10,000$

In other words, evevry copier added will rise production in 10,000 pages/day.

The marginal productivity of the copiers, assumed constant, can be calculated as

$\frac{\Delta P}{\Delta w}=\frac{25,000}{5}=5,000$

Every worker added will increase production in 5,000 pages/day.

If the cost of a copier is 4 times the cost of a worker, the break-even point should be when the copier marginal productivity is 4 times the marginal productivity of a worker.

That means that the new copier has to produce a marginal production of at least 4*5,000=20,000 pages per day.

Because the marginal productivity of the copier is below this break-even point (10,000<20,000), we can conclude that the expansion should be adding more workers, as long as the marginal productivities remain the same.