Question

Suppose an additional worker can handle an additional 10 orders per hour. That will cost $15 per hour. An additional telephone answering machine will handle an additional 20 calls per hour at a cost of $10 per hour. Which of the following is correct? A The firm should increase labor and decrease capital, because labor costs more per hour. B The firm should increase capital and decrease labor, because labor produces less per hour. C The firm should increase capital and decrease labor, because labor produces less per dollar spent. D The firm should increase labor and decrease capital, because labor produces less per dollar spent.

Answer 1

Answer:

In this case,the answer would be option C. or The firm should increase capital and decrease labor, because labor produces less per dollar spent.

Explanation:

• In this case,the productivity of labor for per dollar spent is less than the marginal productivity of telephone answering machine for per dollar spent.
• Here,one worker can handle an additional 10 orders per hour at the cost of $15 per hour.The productivity of labor per dollar spent by the firm or company=$\frac{10}{15}=\frac{2}{3}$.
• One answering machine can handle an additional 20 calls per hour at the cost of $10 per hour.Hence,the productivity of telephone answering machines per dollar spent by the firm or company=$\frac{20}{2}=10$.
• Hence,based on the comparison between the productivity per dollar spent,the firm or company hire more telephone answering machines and decrease the amount of labor to reduce the overall cost of production or operation.