Applied Problems from Chapters 8 and 9

Applied Problems from Chapter 8 and 9
Marquita B. Mouton
BUS 640 Managerial Economics
Charles Fanning
December 6, 2010
Applied Problems from Chapters 8 and 9 The application of material is the true test of knowledge. With the help of the concepts and theories learned from Chapter 8 and 9, this paper will answer the second applied problem from Chapter 8 and the second and fourth applied problems from Chapter 9. Chapter 8 At a management luncheon, two managers were overheard arguing about the following statement: “A manager should never hire another worker if the new person causes diminishing returns.” Is this statement correct?

The scenario presented describes a question managers must face every day. It is not wise hire another workers solely due to them causing diminishing returns. According to the Law of Diminishing Marginal Product, as long as the marginal product does not become negative, it would be wise that a manager hire beyond the initial diminishing number (Thomas and Maurice, 2011). For example, if 1200 units need to be produced and the 11th person hired causes the returns to diminish, then it would be advantageous to the manager to hire enough employees to satisfy the output without causing the marginal product to drop below zero.

Chapter 9 2. The Largo Publishing House uses 400 printers and 200 printing presses to produce books. A printer’s wage rate is $20, and the price of the printing press is $5,000. The last printer added 20 books to total output, while the last press added 1,000 books to total output. Is the publishing house making the optimal input choice? Why or why not? At the current input, Largo Publishing House is not making the optimal choice on input amounts. With the current inputs, they are underestimating the printers employed. Fifty printers could do the job of 1 printing press machine with a savings of $4,000.

2a. If not, how should the manager of Largo Publishing House adjust input usage? To maximize output on a fixed budget, Largo Publishing House should transfer some of the money spent on printing presses to the printers. At 1650 printers and 195 printing presses, combined they could produce 228,000 books for their limited budget. On the other hand, at 1900 printers and 190 printing presses, Largo Publishing could not only produce the same amount but also save $20,000 in the process.

4. The MorTex Company assembles garments entirely by hand even though a textile machine exists that can assemble garments faster than a human can. Workers cost $50 per day, and each additional laborer can produce 200 more units per day (i.e., Marginal product is constant and equal to 200). Installation of the first textile machine on the assembly line will increase output by 1,800 units daily. Currently the firm assembles 5,400 units per day.

4a. The financial analysis department of MorTex estimates that the price of a textile machine is $600 per day. Can management reduce the cost of assembling 5,400 units per day purchasing a textile machine and using less labor?

No it would not be possible to reduce the cost of assembling 5,400 units per day by purchasing a textile machine at the current worker wage of $50 per day. The cost of the total production would be $5,400 at any point where the amount if textile machines increased and the amount of workers decreased. For example, if three textile machines were bought and the amount of workers was decreased to 72, although totally they would produce 9000 units, it would still cost $5400.

4b. The Textile Workers of America is planning to strike for higher wages. Management predicts that if the strike is successful, the cost of labor will increase to $100 per day. If the strike is successful, how would this affect the decision in part a to purchase a textile machine?

In part a, if more the amount of workers decreased and textile machines were purchased, MorTex would have been spending the same amount of money toward their production total. If the strike is successful and the workers’ wages increased from $50 to 100, it would be in the best interest of MorTex to purchase 9 textile machines and layoff all of their workers. If they pursued this option, they could produce 16,200 units with the same $5,400 they were already spending.

References

Thomas, C. and Maurice, S., Managerial Economics: Foundations of Business Analysis and Strategy, Tenth Edition, Published by McGraw-Hill/Irwin, 2010.

References: Thomas, C. and Maurice, S., Managerial Economics: Foundations of Business Analysis and Strategy, Tenth Edition, Published by McGraw-Hill/Irwin, 2010.