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March 27, 2017

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A study by the Computer Manufacturers Association of America analyzed the significant increase in the usage of computers by business firms in the United States over the last two decades. In terms of production theory, one might say the computer--labor ratio has risen. Using production theory, provide a rationale for this trend. Given the falling prices of business computers, what types of changes in business offices would you expect to have occurred?

  • managerial economics - ,

    Business will "hire" a productive resource if the Value of the Marginal Product (VMP) exceeds the Marginal Cost of the resource. A computer is a piece of capital that helps the business produce some kind of output. So, the VMP of a computer goes up if:
    1) the price of the business's output goes up, or
    2) the computer becomes more productive. (Certainly true as computer speeds have become much faster, memory and disk drive capacities have grown, etc.) or:
    3) The computer requires less resources to run. (While the electricity needed to run a computer probably hasn't changed, the number of people needed to service the computer has certainly fallen. )
    The marginal cost of computer certainly has fallen, as one can buy a preaty decent system for about $1000. (15 years ago, I spend $2000+ for the then state of the art home computer.)

    Now compare this to labor. Has labor become more productive? (probably a bit) Has the MC of the worker changed (probably not).

    So, this suggests business, to the extent possible, will substitute computers for labor. (Yes, it may mean hiring mor computer support people. However, overall, the amount of workers needed will almost certainly diminish in relation to the amount of computer equipment purchased.)

    I hope this helps.

  • managerial economics - ,

    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 1800 units daily. Currently the firm assembles 5400 units per day.
    a) The financial analysis department at MorTex estimates that the price of a textile machine is $600 per day. Can management reduce the cost of assembling 5400 units per day by purchasing a textile machine and using less labor? Why or Why not?
    b) 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? Explain.

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