Question

A study by the McKinsey Global Institute reported that labor productivity increased at an average annual rate of 5.8 percent between 1999 and 2013 in​ Mexico's large​ companies, but fell at an average annual rate of 6.5 percent over the same period for​ Mexico's smaller​ firms, such as​ family-owned stores and bakeries. ​Source: Anthony​ Harrup, "Two Economies Explain​ Mexico's Productivity​ Quandary," Wall Street Journal​, March​ 27, 2014. Productivity growth would be much higher for​ Mexico's largest companies than for its smaller companies because the
A. larger companies have greater access to better technology which stimulates productivity growth.
B. smaller companies are more highly regulated and so have lower productivity growth.
C. smaller companies cannot achieve the scale to compete with larger companies.
D. larger companies have more​ employees, so they are more likely to be included in statistical information.

Answer 1

Answer:

The answer is: A) larger companies have greater access to better technology which stimulates productivity growth.

Explanation:

The difference between the productivity of small companies and big companies in Mexico (and many other places) can be explained by the use of better technology. Technology, unlike​ capital, labor and land (3 factors of production), is subject to increasing returns.

While the 3 factors of production are limited by the "Law of Diminishing Marginal Returns ". This concept states that at certain point, using an additional factor of production will result in a smaller increase of the total output, i.e. lower productivity.

For example, if you have a machine in a factory and you increase the other factors of production (labor and materials), the output will be limited by the total possible output of the machine. Once it works 24 hours a day, seven days a week, and 52 weeks per year, it will reach the maximum output.

The only way you can bypass this law is by the introduction of new and better technologies, e.g. the only way to increase output in the factory is to get a better machine.