Question

Question 2 A local fast food restaurant pays $5 per hour to workers and $50 per hour to rent ovens and other kitchen machinery. The restaurant uses seven hours of worker time per unit of machinery time. a. i. Determine whether the restaurant is minimizing its cost of production when the ratio of ii. Do you suggest any adjustment to improve the efficiency in the resource use? A cosmetic company produces skin cream bottles in its local store. The company estimated the marginal products (capital to labour) is 12. b. production function represented below for its long-run capital-labour decisions: Q-500 L K where Q is annual output measured in skin cream bottles, K is capital input measured in machine hours, and L is labour input measured in worker hours. The marginal products of labour and capital are as follows: MPL-300 Lo Ko MPK = 400 Los K42 The employees are highly skilled and earn S15 per hour, while the rental charge of capital is $50 per hour. The firm forecasts annual costs of S500,000 per year. i. Determine the firm's optimal capital-labour ratio, given this information. ii. How much capital and labour should the firm employ, given the S500,000 budget and what is the expected output? iii. The firm is negotiating with the union a new salary per worker hour that may rise to $22.5. What are the effects of the higher wage on the optimal capital-labour ratio of the firm and level of output?

Answer 1

a)

i) As per given cost, ration of input cost will be 50/5 = 10

Ratio of marginal product = 12

Since both ratio are not equal, hence restaurant will not be able to minimize its cost of production.

ii) To minimize the cost of production, restaurant should use more capital and less labor.