Economics Revision

Topics: Diminishing returns, Economics, Economics of production Pages: 1 (296 words) Published: March 28, 2014
Q.6
The management of Anna Industries is considering a plan to terminate a new employee. The action stemmed from documented evidence supplied by the firm's accounting department that this new employee did not add as much to the firm's overall output as did a worker hired two weeks earlier. Based on this evidence, do you agree that the latest worker hired should be fired? Explain No, the latest worker should not be fired if his MP multiply by price is greater than wage, which means he adds value to company Q.7

A firm has two plants, one in the United States and one in Mexico, and it cannot change the size of the plants or the amount of capital equipment. The wage in Mexico is $5. The wage in the U.S. is $20. Given current employment, the marginal product of the last worker in Mexico is 100, and the marginal product of the last worker in the U.S. is 500. a. Is the firm maximizing output relative to its labor cost? Show how you know. b. If it is not, what should the firm do?

ANSWER:
a. MPL/w: Therefore in mexico: 20; in US: 25.. The firm is not maximizing its output. b. The firm should invest more in US.

Q.8. Explain the difference between diminishing marginal returns and the diseconomies of scale? Diminishing returns to scale looks at how production output decreases as one input is increased, while other inputs are left constant. Diseconomies of scale occurs when the per unit cost rises as output is increased. Another major difference between diminishing returns and diseconomies of scale is that diminishing returns to scale occur in the short run, whereas diseconomies of scale is a problem that a Company can be faced with over a longer period of time.
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